UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

Commission File Number: 1-15092

TURKCELL ILETISIM HIZMETLERI A.S.

(Exact name of Registrant as specified in its charter)

TURKCELL
(Translation of Registrant’s name into English)

Republic of Turkey

(Jurisdiction of incorporation or organization)

Turkcell Plaza
Mesrutiyet Caddesi No: 153
34430 Tepebasi
Istanbul, Turkey

(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

*       Not for trading on the New York Stock Exchange, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o  Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

TABLE OF CONTENTS

i

ii

INTRODUCTION

This is the annual report for 2005 for Turkcell Iletisim Hizmetleri A.S., a joint stock company organized and existing under the laws of the Republic of Turkey. The terms “we,” “us,” “our” and similar terms refer to Turkcell, its predecessors and its consolidated subsidiaries except as the context otherwise requires.

Our financial information included in this annual report has been prepared and is presented on a consolidated basis in accordance with US GAAP in US dollars. We have presented this information in accordance with US GAAP, even though we have maintained our books of account and prepared our statutory financial statements in New Turkish Lira in accordance with Turkish Accounting Principles promulgated under the Turkish Commercial Code and Turkish tax legislation, because US and international investors are generally unfamiliar with Turkish Accounting Principles. The consolidated financial statements as of December 31, 2004 and 2005, and for each of the years in the three-year period ended December 31, 2005, included herein have been audited by KPMG Cevdet Suner Denetim ve Yeminli Mali Musavirlik A.S., or KPMG, our independent accountants in Turkey.

Beginning from the 2006 fiscal year, we will prepare our interim and annual consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Our interim and annual consolidated financial statements will include comparable data for 2005. Our first annual report on Form of 20-F filed containing financial information prepared in accordance with IFRS (with a reconciliation to US GAAP) will be that for the fiscal year ending December 31, 2006. The implementation of IFRS may result in material differences in accounting and/or balances of several items in our annual consolidated financial statements, which may include without limitation:

·       Revenue,

·       Sales and marketing expenses,

·       Depreciation and amortization,

·       EBITDA margin,

·       Net income, and

·       Fixed assets, investments, intangibles.

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not total exactly. In this annual report, references to “TL” and “Turkish Lira” are to Turkish Lira, references to “TRY” and “New Turkish Lira” are to the New Turkish Lira and references to “$” and “US dollars” are to US dollars. Except as otherwise noted, all interest rates are on a per annum basis. In this annual report, references to “Turkey” or the “Republic” are to the Republic of Turkey.

FORWARD LOOKING STATEMENTS

This annual report includes forward looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this annual report, including, without limitation, certain statements regarding our operations, financial position and business strategy, may constitute forward looking statements. In addition, forward looking statements generally can be identified by the use of forward looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or similar statements.

1

Although we believe that the expectations reflected in such forward looking statements are reasonable at this time, we can give no assurance that such expectations will prove to be correct. Given these uncertainties, readers are cautioned not to place undue reliance on such forward looking statements. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this annual report, including, without limitation, in conjunction with the forward looking statements included in this annual report.

While we believe that the expectations reflected in these and other forward looking statements are reasonable, actual results may differ materially from the expectations reflected in those statements due to a variety of factors, including, among others, the following:

·       competition in our home market;

·       economic developments in Turkey and the global economy;

·       political developments in Turkey and its neighboring countries;

·       failure of the Turkish mobile telecommunications market to continue to develop;

·       legal and regulatory restrictions, including those imposed by the Telecommunications Authority of Turkey (the “Telecommunications Authority”);

·       enactment of the draft Electronic Communications Law in Turkey;

·       adverse effects on our competitiveness due to our designation by the Telecommunications Authority as an “operator holding significant market power” in the “mobile call termination services market” and as an “operator holding significant market power” in “access to GSM mobile networks and the call origination market”;

·       our disputes with other GSM operators and Turk Telekom over call termination charges;

·       failure to abide by the requirements of our license or applicable regulations;

·       legal actions and claims to which we are a party;

·       foreign exchange rate risks;

·       interest rate risk;

·       the influence of our controlling shareholders;

·       exposure to certain risks through our interests in associated companies;

·       our ability to deal with spectrum limitations;

·       rapid and significant change in the communications industry that may reduce the appeal of our services or require us to increase our capital expenditures;

·       failure by our business partners to carry out their obligations under our agreements;

·       potential liability and possible reduced usage of mobile phones as a result of alleged health risks related to base transmitter stations and the use of handsets;

·       our dependence on certain suppliers for network equipment and the provision of data services;

·       our ability to retain key personnel; and

·       financial risks in the event that our majority owned subsidiaries fail to meet some of their obligations set forth in the agreements related to their financing arrangements.

2

All subsequent written and oral forward looking statements attributable to us are expressly qualified in their entirety by reference to these cautionary statements.

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.              OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.                KEY INFORMATION

3.A  Selected Financial Data

The financial information included in this annual report has been prepared and is presented on a consolidated basis in accordance with US GAAP in US dollars. We have presented this information in accordance with US GAAP, even though we maintain our books of account and prepare our statutory financial statements in Turkish Lira (New Turkish Lira starting from January 1, 2005 onwards) in accordance with Turkish Accounting Principles promulgated under the Turkish Commercial Code and Turkish tax legislation, because US and international investors are generally unfamiliar with Turkish Accounting Principles. Our financial statements and those of our subsidiaries located in Turkey and Northern Cyprus have been translated into US Dollars, our reporting currency, in accordance with the relevant provisions of SFAS No. 52, “Foreign Currency Translation” as applied to entities in highly inflationary economies. Beginning from the 2006 fiscal year, we will prepare our interim and annual consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Please see “Item 5.A. Operating Results” for further information on our transition to reporting our consolidated financial statements in accordance with IFRS.

The following table presents our selected financial data as of and for each of the years in the five-year period ended December 31, 2005. We have derived the selected consolidated financial data set forth below as of and for each of the years in the five-year period ended December 31, 2005, from our audited consolidated financial statements and the notes thereto, which were prepared in accordance with US GAAP and audited by KPMG, our independent accountants in Turkey.

You should read the following information in conjunction with “Item 5. Operating and Financial Review and Prospects,” our consolidated financial statements as of December 31, 2004 and 2005 and for each of the years in the three-year period ended December 31, 2005, the related notes and the independent auditors’ report appearing elsewhere in this annual report. Our consolidated financial statements as of and for the years ended December 31, 2002 and 2001 are not included in this annual report.

The information appearing under the captions “Other Financial Data” and “Operating Results” is not derived from the audited financial statements.

3

(1)             We adopted EITF 01-09 “Accounting for Consideration Given to a Customer or a Retailer of the Vendor’s Products” on January 1, 2002. As a result of applying the provisions of EITF 01-09, our revenues, gross profit, and selling and marketing expenses were reduced by $84.7 million for the year ended December 31, 2001. The adoption of EITF 01-09 had no impact on operating income, net income (loss) or earnings (loss) per share. As a result of the application of EITF 01-09 to prior periods, certain figures provided in this annual report will differ from figures provided previously.

(2)             Direct cost of revenues includes ongoing license fee payments, transmission fees, base station rents, billing costs, depreciation and amortization charges, technical, repair and maintenance expenses, roaming charges, interconnection fees, wages, salaries and personnel expenses for technical personnel.

4

(3)             Equity in net income (loss) of unconsolidated investees includes primarily the income (loss) from Fintur Holdings B.V. (“Fintur”) of which we own 41.45%. Fintur currently holds all of our International GSM investments other than our Northern Cyprus and Ukraine operations. During 2002, Fintur restructured its two business divisions, the international GSM businesses and the technology businesses. As part of the restructuring, we acquired 16.45% of Fintur’s international GSM businesses from the Cukurova Group, increasing our ownership interest in that business to 41.45% and Fintur sold its entire interest in its technology businesses to the Cukurova Group. See “Item 4B. Business Overview—International Operations—Fintur.”

(4)             Net income (loss) per share figures have been restated to reflect the effect of certain stock splits as explained in note 22 to the consolidated financial statements.

(5)             The US$ equivalent of the cash dividends declared for the year ending December 31, 2005, which amount to TRY509,075,181, was computed by using the Central Bank of Turkey’s TRY/US$ exchange rate on March 22, 2006, which is the date our board of directors decided to make a proposal at our General Assembly meeting for distribution of dividends. Distribution of dividends is subject to approval at our General Assembly meeting which will be held on April 28, 2006.

(6)             In 2004 we paid dividends of $78.1 million for the year ended December 31, 2003, when 500,000,000 of our shares were outstanding. In 2005 we declared dividends of $182.2 million for the year ended December 31, 2004, when 1,854,887,341 of our shares were outstanding. In 2006, our Board of Directors have proposed a dividend payment of $379.2 million for the period ended December 31, 2005, when 1,854,887,341 of our shares were outstanding. The decision of the Board of Directors is subject to approval of the General Assembly which will be held on April 28, 2006. Dividends per share for the year ending December 31, 2003 is computed over 1,854,887,341 shares in order to reflect the effect of certain stock splits as explained in note 22 to the consolidated financial statements.

(7)             Gross margin has been calculated as gross profit divided by total revenues.

(8)             EBITDA equals net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. EBITDA is not a measurement of financial performance under US GAAP and should not be construed as a substitute for net earnings (loss) as a measure of performance or cash flow from operations as a measure of liquidity. It is used in this annual report because it is a common and useful measure of performance of a mobile operator. See below for a reconciliation of EBITDA to the most directly comparable US GAAP measure.

(9)             Consists of long-term debt and long-term lease obligations.

(10)       In connection with the redenomination of the Turkish Lira and as per the related amendments of  Turkish Commercial Code, in order to increase the nominal value of the shares to TRY 1, 1,000 units of shares, each having a nominal value of TRY 0.001 shall be consolidated and each unit of share having a nominal value of TRY 1 shall be issued to represent such shares. Turkcell is currently in the process of merging 1,000 existing ordinary shares, each having a nominal value of TRY 0.001 to one ordinary share having a nominal value of TRY 1. After the share consolidation which appears as a provisional article in the Articles of Association to convert the value of each share with a nominal value of TRY 0.001 to TRY 1, all shares will have a value of TRY 1. Although the consolidation process has not been finalized, the practical application is to state each share having a nominal value of TRY 1 which is consented by Capital Market Board of Turkey (“CMB”). Basic and deleted weighted average number of shares and net income per share as of December 31, 2001, 2002, 2003 and 2004 are retrospectively changed to reflect each share having a nominal value of TRY 1.

The following table provides a reconciliation of EBITDA, which is a non-GAAP financial measure, to net cash provided by operating activities, which we believe is the most directly comparable financial measure calculated and presented in accordance with US GAAP.

5

We believe that EBITDA, a measure commonly used in the telecommunications industry in Europe, can enhance the understanding of our operating results.

Operating Results

(1)          The Turkish population for 2001, 2002, 2003 and 2004 has been estimated based upon the 1996 and 2000 censuses prepared by the Turkish Statistical Institute, applying a projected monthly growth rate of 0.13%.

(2)          Subscriber numbers do not include the subscribers in Ukraine and Northern Cyprus.

(3)          We calculate average revenue per user, ARPU, using the weighted average number of our subscribers during the period. ARPU does not include the results of our operations in Ukraine and Northern Cyprus.

(4)          Average monthly minutes of use per subscriber is calculated by dividing the total of incoming and outgoing airtime minutes of use by the average monthly number of postpaid and prepaid subscribers for the year divided by twelve. Our Minutes of Usage (“MoU”) calculation does not include our operations in Ukraine and Northern Cyprus.

(5)          Churn is calculated as the total number of subscriber disconnections during a period as a percentage of the average number of subscribers for the period. Our churn calculations do not include our operations in Ukraine and Northern Cyprus.

(6)          See “Item 6D. Employees” for information with respect to our consolidated subsidiaries.

Exchange Rate Data

Effective January 1, 2005, the Turkish Parliament redenominated the Turkish Lira and created a new currency, the New Turkish Lira or TRY. One million Turkish Lira are equal to one New Turkish Lira. Turkish Lira remained in circulation along with the New Turkish Lira, until the end of 2005. Effective January 1, 2006, only New Turkish Lira are in circulation in Turkey.

The Federal Reserve Bank of New York does not report a noon buying rate for the New Turkish Lira, and historically has not reported a noon buying rate for the Turkish Lira. For the convenience of the

6

reader, this annual report presents unaudited translations of certain New Turkish Lira amounts into US dollars at the relevant New Turkish Lira exchange rate for purchases of US dollars at the TRY/$ Exchange Rate announced by the Central Bank of Turkey. In addition, this annual report presents unaudited translations of certain New Turkish Lira amounts into US dollars at the relevant New Turkish Lira exchange rate for purchases of US dollars at the TRY/$ Exchange Rate announced by the Central Bank of Turkey. Unless otherwise stated, any balance sheet data in US dollars derived from our consolidated financial statements are translated from New Turkish Lira into US dollars at rates for US dollars announced by the Central Bank of Turkey on the date of such balance sheet for monetary assets and liabilities and at historical rates for capital and nonmonetary assets and liabilities. Any data from our consolidated statements of operations in US dollars derived from our consolidated financial statements are translated from New Turkish Lira into US dollars at historical rates. Unless otherwise indicated, the TL/$ exchange rate or TRY/$ exchange rate used in this annual report is the TL/$ exchange rate or TRY/$ exchange rate in respect of the date of the financial information being referred to.

The following table sets forth, for the periods and the dates indicated, the Central Bank of Turkey’s buying rates for US dollars. These rates may differ from the actual rates used in preparation of our consolidated financial statements and other information appearing herein. The TRY/$ exchange rate as of April 7, 2006 was TRY 1.331 = $1.00.

Source: Central Bank of Turkey                

(1)          Calculated based on the average of the exchange rates on the last day of each month during the relevant period.

(2)          These columns set forth the Central Bank of Turkey’s buying rates for US dollars expressed in New Turkish Lira.

(3)          ThroughApril 7, 2006.

Source: Central Bank of Turkey

(1)          Through April 7, 2006.

No representation is made that the New Turkish Lira or the US dollar amounts in this annual report could have been or could be converted into US dollars or New Turkish Lira, as the case may be, at any particular rate. Changes in the exchange rate between New Turkish Lira and US dollars could affect our financial results. For a discussion of the effects of fluctuating exchange rates on our business, see “Item 5A. Operating Results.”

3.B   Capitalization and Indebtedness

Not applicable.

7

3.C   Reasons for the Offer and Use of Proceeds

Not applicable.

3.D   Risk Factors

Competition in our home market has increased in recent years and may continue to increase in the future.

We currently face competition from Telsim and Avea in the Turkish GSM sector. Competition is likely to increase due to structural changes in the competitive environment. Oger Telecom acquired 55% of Turk Telekom which has 40% interest in Avea in July 2005 in a competitive tender process. The partial privatization of Turk Telekom and the consequent change in Avea’s ownership may lead to increased competition for us in the GSM market if Avea is able to benefit from its position as an affiliate of Turk Telekom by entering into favorable agreements with them on terms that would not normally be available to other mobile network operators. Additionally, Telsim was sold to Vodafone in December 2005; the sales process is still awaiting approval and is expected to be finalized in the second quarter of 2006. As a large multinational, Vodafone’s entrance into the Turkish market is expected to increase competition and possibly shift market dynamics.

In addition to the aforementioned competitors, we expect to face increased direct competition from, among others, long distance carriers, fixed line telephony providers,  mobile virtual network operators and value added services providers.  In May 2004, the Telecommunications Authority granted long distance licenses, allowing the licensees to provide both domestic and international long distance telephony services. As of March 31, 2006, approximately 44 companies had received such licenses but only a few are operational. The licensees who have not yet signed interconnection agreements with Turk Telekom continue to oppose being subject to the interconnection rates set by the Telecommunications Authority, arguing that the rates are too high compared to the average benchmark rates in Europe. Although these long distance telephony providers have not yet had a significant effect on our operations, in the long-term they could have the effect of driving down prices and shifting traffic patterns for long distance calls in Turkey.

The Telecommunications Authority is in the process of preparing regulations for Mobile Number Portability (“MNP”), Mobile Virtual Network Operators (“MVNO”), Third Generation (“3G”) and Value Added Services licenses (“VAS”). Although it is unclear exactly when or even if they will be issued, these potential regulatory changes have the potential to significantly affect market dynamics.

·       The introduction of MNP in the Turkish market may lead to an increase in churn rates and thus have a significant impact on both Turkcell and the market.

·       The introduction of MVNO’s into the market may mean, in accordance with the regulations of the Telecommunications Authority, that we will be required to provide access and/or interconnection services to MVNOs, which may place us at a competitive disadvantage.

·       The issuance of 3G licenses and the introduction of 3G services in Turkey could lead to significant changes in the competitive environment, especially if the Telecommunications Authority decides to award more than three 3G licenses, which would mean a new entrant in the current three-player network operator market.

·       VAS licenses issued could have a negative impact on our VAS operations.

Each of these potential changes in market dynamics could have a negative impact on our ability to attract and retain customers, the competitiveness of our products and services, our distribution channels, our brand and our infrastructure investments, which, in turn, could have a material adverse effect on our business, consolidated financial condition and results of operations.

8

Economic developments in Turkey and in the global economy have had, and may continue to have, a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Although the Turkish economy has showed signs of improvement and relative stability over the last three years, it had experienced significant turmoil in previous years. In particular, high inflation, volatility in the debt and equity markets, and a significant depreciation of the Turkish Lira against the U.S. dollar affected Turkey in 2001 and 2002. However, a revised International Monetary Fund (IMF) stand-by agreement introduced in 2005, tight macroeconomic and fiscal policies initiated by the Turkish government and the start of talks to evaluate Turkey for membership in the European Union (EU) has had a positive effect on the Turkish economy. The Turkish Lira has been appreciating against the US dollar since April 2003, although there have been short-term periods where the Turkish Lira depreciated against the US dollar due to some political turmoil and international developments in emerging markets. The New Turkish Lira may depreciate if Turkey is unable to meet obligations to reform its social security and other entitlement programs in accordance with EU or IMF requirements.

Our consolidated financial condition, future operations and cash flows and, in particular, our operating results, including average monthly revenue per user, may be negatively impacted as a result of the economic factors affecting the Turkish economy, which include the following:

·       Widening of the current account deficit accounted for approximately 6% of GDP at the end of 2005, due to further appreciation of the New Turkish Lira and increasing consumer consumption. Although the amount of foreign direct investment into Turkey increased in 2005, the cancellation of some privatizations and bureaucratic problems may limit the future financing of Turkey’s significant current account deficit.

·       Sustainability of sovereign debt, or the capacity to service debt, has been a concern with respect to the Turkish economy for years. Turkey has made progress in restoring debt sustainability with primary surplus and growth and a lowering of borrowing costs but there are no assurances that this progress will continue.

·       Although inflation rates came down to single digit levels in 2004 for the first time in 40 years and this downward trend continued in 2005, there are no assurances that this trend will continue. A sudden increase in inflation due to local and international factors like a rise in oil prices or depreciation of the New Turkish Lira may have a negative impact on the economy.

In addition to the foregoing one of the political reasons that caused the Turkish economy to further develop and improve was the start of negotiations to evaluate Turkey for membership in the European Union (EU) on October 3, 2005. Any negative developments or delays in this process during 2006 may have a material adverse impact on the Turkish economy. The failure of the Turkish government to devise or implement appropriate economic programs, or the failure of the IMF to complete periodic reviews of the economic program introduced by the IMF in 2005, may also adversely affect the Turkish economy.

Political developments in Turkey and its neighboring countries may have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

The Adalet ve Kalkinma Partisi (“AKP”) government is the first majority, non-coalition government that Turkey has enjoyed in over 12 years. General elections are not scheduled until the end of 2007. There can be no assurance that the AKP will be re-elected with a majority and Turkey may once again be governed by a coalition, which historically has proven to be less effective. Any negative changes in the government or political environment, including conflicts between senior politicians in Turkey, may create instability and may adversely affect the Turkish economy.

9

The current government has had difficulties addressing the economic and social demands of AKP’s supporters, which may have electoral consequences. In particular, AKP’s core Islamist supporters have periodically expressed unhappiness with the government’s handling of various matters of domestic and international policy. Despite previous attempts by AKP to address these issues, some of these attempts have faced resistance from the president and the military. Any future attempts may face similar resistance, which could potentially create political and economic instability within Turkey.

Turkey has also had problems with terrorist and ethnic separatist groups in recent years. In 2003, Turkey experienced several terrorist attacks, including the bombings of HSBC Bank, the British Consulate, and two synagogues in Istanbul. These attacks caused casualties and had a negative impact on the financial markets. The continuing threat of global terrorism could have a negative impact on the Turkish government’s ability to function effectively or on the overall Turkish economy.

Political uncertainty within Turkey, armed conflict and the threat of armed conflict in neighboring countries, such as Iran, Syria, Georgia and Armenia, historically have been among the potential risks associated with investment in Turkish companies. The uncertainty and potential instability surrounding the post-war situation in Iraq, as well as tension in and involving the Kurdish regions of northern Iraq, could also have negative economic consequences for us. Although relations with the United States have always played a major role in the stability of the Turkish economy, the relationship has become even more important due to the United States’ presence and role in post-war Iraq. In addition, the current tension between Iran, the United Nations and the United States related to Iran’s nuclear program may negatively affect Turkey economically and politically. Furthermore, even though in recent years Turkey has undergone significant political and economic reforms, Turkey is generally considered by international investors to be an emerging market. In general, investing in the securities of issuers with substantial operations in emerging markets like Turkey involves a higher degree of risk than investing in the securities of issuers with substantial operations in the United States, the countries of the EU or other similar jurisdictions.

In addition to our investments in Fintur, we have been operating a GSM network in Northern Cyprus since July 1999 and have begun operations in Ukraine since the second half of the year 2004. Any hostilities and/or political instability in Cyprus may have a material adverse effect on the Northern Cypriot economy as well as on the economy of Turkey, the progress of Turkey’s accession talks with the EU and on our investments and business in Northern Cyprus. Furthermore, any political instability in Ukraine may have a negative impact on our newly formed operations.

The growth of our business is dependent upon the continued development of the Turkish mobile telecommunications market.

The subscriber mobile line penetration rate in Turkey is relatively low in comparison to penetration rates in EU countries. As of the end of 2005, the line penetration rate in Turkey was approximately 60% according to the Telecommunications Authority. This figure is probably higher than the actual subscriber  penetration rate as it includes multiple SIM card usage. The development of our business will depend, in large part, on the future level of demand for mobile telecommunications in Turkey. Although we expect continued growth in the number of mobile telecommunications subscribers in Turkey, we expect the growth rate to be less than that of recent years. In addition, the size and usage patterns of our future subscriber base will be affected by a number of factors, many of which are outside our control. Such factors include, general economic conditions, the gross domestic product per capita of Turkey, the development of the GSM market and any rival technology for the provision of mobile telecommunications services, the price of handsets, the availability, quality and cost to the subscriber of competing mobile services and improvements in the quality and availability of fixed line telephone services in Turkey. We have seen a trend towards more prepaid subscribers in our subscriber base relative to postpaid subscribers. As prepaid subscribers tend to spend less, this trend could lead to lower ARPU. Just as the economic crisis in Turkey

10

in 2001 led to a decrease in the rate of subscriber growth and caused a significant decline in average monthly minutes of use per subscriber and average monthly revenue per user, all of which adversely impacted our operations and financial results, any possible future disruptions in the Turkish economy could lead to declines in the rate of subscriber growth, average monthly revenue per user and/or average monthly minutes of use per subscriber. Given these factors, it is difficult to predict with any degree of certainty the future growth of either mobile telecommunications services in Turkey or the number of subscribers.

A large amount of our business is or may be subject to significant legal and regulatory restrictions.

Turkey’s Telecommunications Authority is empowered to regulate licensing, competition, ownership, frequency allocation and arrangements pertaining to interconnection and general operations of GSM networks. The Telecommunications Authority is responsible for issuing licenses and general permissions as well as concluding concession agreements with the operators. Therefore, actions of the Turkish government, the Telecommunications Authority or other regulatory authorities in Turkey (such as the Competition Board) have in the past, and could in the future, adversely affect our business. Such actions could include:

·       changes in laws, regulations or governmental policy, or their interpretation, including revisions to the interconnection and access regime or the imposition of price controls;

·       any unfavorable change in corporate and/or income tax legislation, or the imposition of consumption taxes or other taxes, including the possible imposition of an environmental tax, on subscribers or mobile operators;

·       granting additional mobile telephone licenses or other telephony licenses to new entrants and existing operators;

·       the establishment of limitations on our operations or restrictions on our ability to provide services to existing or new subscribers;

·       investigations, enforcement actions or other assessments of the Competition Board or other regulatory authorities;

·       denial of discretionary benefits that we may seek in expanding our network; and

·       the introduction of additional fees or charges by governmental authorities.

In the case of war, general mobilization or when the Telecommunications Authority considers it necessary for public safety and national defense, we may be required to surrender the control of our network wholly or partially to the Telecommunications Authority for a limited or unlimited period.

Any of these factors could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Enactment of the Electronic Communications Law could have a material adverse effect on our operations and financial results.

Passage of the draft Electronic Communications Law, which is expected to be released in 2006, would result in an expansion of the Telecommunications Authority’s powers and could lead to an increase in our current obligations, which may adversely affect our operations and financial results. The draft law grants the Telecommunications Authority, among other things, the power to establish general criteria with respect to tariffs applicable to users and operators, and to approve and amend tariffs. The draft law would also considerably increase the fees paid by operators, including administrative fees paid towards the expenses of the Telecommunications Authority and infrastructure fees paid per item of network infrastructure. Finally, the draft law would increase the power of the Telecommunications Authority,

11

including its ability to impose administrative fines in the case of breaches by operators of applicable laws and regulations, usage fees, provisions of concession (license) agreements, other rules of authorization or the provisions of wireless licenses. It sets the maximum limit of the fine at 5% of net sales in the previous year of the relevant service. The law also grants the Telecommunications Authority the power to impose various obligations on operators having significant market power, such as requiring them to provide access to their network or interconnecting at a price based on cost. Increases in fees or fines payable by us, a reduction in our tariffs or an order for us to open our networks at a price based on cost to potential competitors as a result of the Electronic Communications Law could have a material adverse effect on our operations and financial results.

The Telecommunications Authority has designated Turkcell as an “operator holding significant market power” in the “mobile call termination services market” and an “operator holding significant market power” in “access to GSM mobile networks and the call origination market” which could affect our competitiveness and have a material adverse affect on our results of operations.

Pursuant to the Access and Interconnection Regulation promulgated by the Telecommunications Authority, in 2003 Turkcell was designated by the Telecommunications Authority as an “operator holding significant market power” in the GSM mobile call termination services market and Telsim and Avea were so designated in 2005. As a result of this designation, the operators holding significant market power are required to provide interconnection services to any requesting operator at a price based on cost while such requesting operator is entitled to charge operators holding significant market power more for interconnection to its network, which may put such operators at a competitive disadvantage. Operators who are not designated as holding significant market power have the right to freely set the prices they charge other operators for interconnection services. If parties are unable to reach an agreement, the Telecommunications Authority may intervene to establish the terms between the parties.

In September 2004, the Telecommunications Authority published “Standard Reference Interconnection Tariffs”, which recommends call termination fees for operators holding significant market power in the GSM mobile call termination services market and Turk Telekom. These “Standard Reference Interconnection Tariffs” are not necessarily directly applicable to our current or future interconnection agreements. However, if the Telecommunications Authority decides to set the termination fees for us it may use these rates, as it has done in connection with our dispute with Turk Telekom. The call termination rates set forth in the “Standard Reference Interconnection Tariffs” are lower than the current termination rates set forth in our interconnection agreements and could be applied by the Telecommunications Authority in the event that new pricing terms for interconnections among operators are not agreed. As a result, the Telecommunications Authority may set standard rates for terminations made on our networks and set standard rates for terminations of our calls on other networks that are lower than our current rates.

In 2005, the Telecommunications Authority also designated Turkcell as an operator having significant market power in the access to GSM mobile networks and call origination market. If MVNO, 3G and similar licenses are granted to operators by the Telecommunications Authority in the future, this designation may mean that we can be compelled by regulators to allow such operators to originate calls on our network and to sign call origination agreements with such operators.

Our disputes with other GSM operators and Turk Telekom over call termination charges could have a material adverse effect on our results of operations.

Pursuant to the terms of interconnection agreements we entered into with Telsim, Avea and Turk Telekom, the call termination charges provided for in such agreements were to be revised after June 30, 2004 with respect to Telsim and Avea and after December 31, 2004 with respect to Turk Telekom. As of the date of this report, we have been unable to agree on call termination charges with Avea, Telsim and Turk Telekom. Avea, Telsim and Turk Telekom have each applied to the Telecommunications Authority to initiate mediation procedures to establish call termination charges. The Telecommunications Authority

12

has set provisional call termination charges in our dispute with Turk Telekom, but we are challenging these provisional charges in the Turkish courts. The Telecommunications Authority has not yet reached a decision in our disputes with Avea and Telsim. For further discussion of these and other disputes with Avea, Telsim and Turk Telekom, please see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings”.

If we do not prevail in any or all of our disputes with Avea, Telsim and Turk Telekom, we may have to renew call termination rates determined in the existing interconnection agreements signed with them at rates lower than our prevailing rates and this could have a material adverse impact on our results. There also can be no assurance that new pricing terms negotiated by us or imposed on us by the Telecommunications Authority will be favorable to us. In addition, the impact of any new pricing terms or possible future changes and their long-term impact are not clear, as the revenue composition will depend on future changes in traffic, call patterns and consumer behavior, including the response of consumers to changes in retail end-user pricing.

We could face severe penalties, including limitation or revocation of our license in extreme cases, if applicable regulatory authorities determine that we are not in compliance with the requirements of our license or applicable regulations.

The statutes, rules and regulations applicable to our activities and our license are generally new, subject to change, in some cases, incomplete, and have been subject to limited governmental interpretation. Precedents for and experience with business and telecommunications regulations in Turkey are generally limited. In addition, there have been several changes to the relevant legal regime in recent years. There can be no assurance that the law or legal system will not change further or be interpreted in a manner that could materially and adversely affect our operations.

Our license contains a number of requirements, including requirements regarding operation, quality and coverage of the GSM network; national security issues; maintenance of confidentiality; prohibitions on anticompetitive behavior; and compliance with international and national GSM standards. If we fail to meet any requirement in our license or to comply with applicable regulations, we could be subject to sanction, including the limitation or revocation of our license.

Lack of clarity with respect to Turkish telecommunications law, the Turkish legal system, our license and/or the regulatory framework governing the Turkish telecommunications industry could impede our ability to operate effectively under our license and have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

In addition, Turkey’s accession talks with the EU may require further modifications in the regulatory framework governing the Turkish telecommunications industry, any or all of which may be detrimental to our competitive position or our operations.

For a description of our license and the regulatory regime under which we operate in Turkey, see “Item 4B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

In addition to the foregoing, our indirectly owned subsidiary, Astelit, holds GSM licenses in Ukraine. If Astelit fails to comply with the terms and conditions of its license agreement it may incur significant penalties, which could have a material adverse effect on our international expansion strategy and our business and results of operations.

13

We are involved in various claims and legal actions arising in the ordinary course of our business.

We are involved in various claims and legal actions with governmental authorities in Turkey, including the Competition Board, the Telecommunications Authority and certain other parties. In addition, we may be involved in additional claims and legal actions with various governmental and other parties in the future. For a more detailed discussion of all of our significant disputes, see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings”.

We are exposed to foreign exchange rate risks that could significantly impact our ability to meet our obligations and finance our network construction.

A substantial majority of our debt obligations and capital expenditures are currently, and are expected to continue to be, denominated in US dollars, euros and Swedish krona. By contrast, a significant portion of our revenue is, and will continue to be, denominated in New Turkish Lira. Although we have successfully operated in a hyper inflationary environment with continuous devaluation of the Turkish currency since our inception, sudden increases in inflation or the devaluation rate have had, and may continue to have, an adverse effect on our consolidated financial condition, results of operations or liquidity.

We use analytical techniques such as market valuation and sensitivity and volatility analysis to manage and monitor foreign exchange risk. We keep some of our monetary assets in US dollars, euros and Swedish krona to reduce our foreign currency exposure. To manage our foreign exchange risk more efficiently, we have entered into forward transactions to buy and sell US dollars, and in 2006 we purchased $171 million whereas we sold $1 through these forward transactions. Meanwhile, we are committed to buy more foreign currency than the notional transaction amount if the spot rate falls below the forward level. As of March 24, 2006, the notional amount of forward US dollars purchases is $390 million and the amount can increase up to $780 million, and the notional amount of forward US dollars sales is $150 million and the amount can increase up to $300 million depending on the spot rate level at maturity. Some of these forward contracts knock-out at predetermined strike levels which will expose us to USD/TRY devaluation risk. We have entered into forward agreements on various dates, with maturities ranging from one to six months, to purchase US dollars against New Turkish Lira at pre-determined levels. Forward purchases are determined according to significant outgoing US dollar payment dates in order to hedge against sudden foreign currency movements. Under the forward contracts with knock-out options, more favorable forward purchase rates are achieved in return for the risk of no purchase.

In order to take advantage of market volatility in the foreign exchange and fixed income markets, we have entered into option contracts starting from 2006, in line with our treasury policies. Option contracts allow us to either hedge our exposure or collect premiums depending on their types. Any options exercised that are either above or below market levels might result in unfavorable results to us. Conversely, any options we exercise would allow us to hedge against foreign currency risks.

The maximum tariffs we may charge are adjusted periodically pursuant to a formula set forth in our license agreement. Although we believe the tariff structure in our license will, in most instances, permit adjustments designed to offset the devaluation of the New Turkish Lira against the US dollar, any such devaluation that we are unable to offset will require us to use a larger portion of our revenue to service our non-New Turkish Lira foreign currency obligations. Additionally, in the event that the Telecommunications Authority were to establish maximum tariffs at levels below those that would enable us to adjust our rates to offset devaluations, this could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

In addition to the foregoing risks, we also face risks associated with the appreciation of the New Turkish Lira against the US dollar. Since we keep some of our monetary assets in US dollars, a significant increase in the value of the New Turkish Lira would reduce the effective value of such holdings.

14

Additionally, an appreciation of the New Turkish Lira relative to the US dollar would impact the value of our Turkish Lira-denominated liabilities and could have a material adverse effect on our results of operations.

We incurred currency translation losses of approximately $102.4 million, $11.2 million and $8.3 million for the years ended December 31, 2003, 2004 and 2005, respectively. Although we expect that the macroeconomic situation in Turkey will stabilize, there can be no assurance that our expectations will prove correct and we may incur foreign exchange losses in the future.

We are also exposed to interest rate risk on our variable rate borrowings. An increase in Libor rates would increase our interest exposure through increased interest expense.

As of December 31, 2005, approximately 78% of our outstanding debt was variable rate debt. In 2005, we fixed the Libor rate for one year for some of our floating rate debt instead of the usual market practice of setting the rate for three or six months, in order to partially hedge our interest rate risk against possible short term interest rate increases. In order to hedge our interest rate risk, we continue to look for hedging alternatives such as interest rate swaps. We currently do not have any outstanding swap arrangements due to the cost of such arrangements in the market and the general market view of forward interest rates. Therefore, an increase in the Libor rates would cause an increase in the amount of our interest payments and could have a material adverse effect on our financial condition.

The Cukurova Group and TeliaSonera together currently hold a majority of our outstanding share capital which allows them together to exercise a controlling influence over us. This ownership may also have the effect of delaying, deferring or preventing a change of control of Turkcell.

As of the date of this annual report on Form 20-F, TeliaSonera, the Cukurova Group and the Alfa Group (through its Altimo subsidiary) currently own, directly or indirectly, approximately 37% , 27% and 13%, respectively, of our share capital. If the Cukurova Group, the Alfa Group and TeliaSonera act together they have the ability to exercise a controlling influence over matters requiring a simple majority vote of the shareholders at a general assembly, such as the right to vote against changes to our articles of association and the right to approve the annual accounts. TeliaSonera, the Cukurova Group and the Alfa Group hold a portion of their interests in us through Turkcell Holding, a holding company that holds 51% of our shares. To the extent that the interests of the Cukurova Group, the Alfa Group and TeliaSonera differ from our interests or those of our other shareholders, we or our other shareholders could be disadvantaged by any actions that the Cukurova Group, the Alfa Group and TeliaSonera might seek to pursue.

The ownership of a substantial percentage of our outstanding ordinary shares by the Cukurova Group, TeliaSonera and Alfa and the affiliation of these shareholders with members of the board of directors may have the effect of delaying, deferring or preventing a change in control of Turkcell, may discourage bids for our ordinary shares or ADSs and may adversely affect the market price of the ordinary shares or ADSs. Additionally, we benefit from our relationship with TeliaSonera and the Cukurova Group. If our relationship with either or both shareholders is impaired, or if either of our shareholders were to substantially change its shareholding in us, we may be adversely affected.

In addition, the Cukurova Group and TeliaSonera are currently involved in a dispute regarding the proposed sale by the Cukurova Group to TeliaSonera of certain holdings in Turkcell Holding A.S. Class B shares. This dispute between the Cukurova Group and TeliaSonera could result in the failure of our three major shareholders to have a cooperative relationship, which could adversely impact the ability of our principal shareholders to achieve the consensus necessary to approve important matters relating to our business and operations. Furthermore, the introduction of a third major shareholder, Alfa Group, may further lead to a restructuring in the Company’s board of directors to reflect the new shareholding structure.

15

We hold interests in several companies that may expose us to various economic, political, social, financial and liquidity risks and may not provide the benefits that we expect.

We work through subsidiaries and associated companies both within Turkey and internationally. Our international investments in these companies could expose us to economic, political, social, financial and liquidity risks in Georgia, Azerbaijan, Kazakhstan, Moldova and Ukraine which were all part of the former Soviet Union. Azerbaijan, Georgia, Kazakhstan, Moldova and Ukraine are generally considered by international investors to be emerging markets. Their legal systems, including telecommunications regulations, are relatively underdeveloped and their economies have only recently begun to open to market principles after years of functioning under the Soviet system of central planning. Market institutions and commercial practices are weaker and less developed. There can be no assurance that political, legal, economic, social or other developments in these nations will not have an adverse impact on our investments and businesses in these countries. Our interests in these companies in Turkey may also not provide us with the benefits we expect if such companies fail to obtain or retain the various licenses required for their operations. In addition, we have operated a GSM Network in Northern Cyprus since July 1999, which may expose us to a number of risks. Any hostilities and/or political instability in Cyprus may have a material adverse effect on the Northern Cypriot economy as well as on the economy of Turkey, the progress of Turkey’s accession talks with the EU and our investments and business in Northern Cyprus. See “—Political developments in Turkey and its neighboring countries may have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.”

We have been operating in Ukraine since the second half of 2004. Our recent capital expenditures in Ukraine have been especially significant. The country is undergoing a great deal of change. Any political instability in Ukraine may have a negative impact on our newly formed operations. On March 26, 2006, the first parliamentary elections since the Orange Revolution were held. The outcome of the elections may have a negative effect over the business environment of Ukraine and may even lead to major political issues in the country which is in transition from a presidential to a more parliamentary system. So far the country’s economic performance has failed to meet expectations and this less than expected growth may continue and therefore may affect the purchasing power of the population and therefore the expected revenue of Astelit, our Ukrainian subsidiary. Although the local currency has been relatively stable for almost two years, this situation may change in the future as a result of the country’s balance of payments issues. Astelit has recently entered into a long term financing deal with some international banks and has therefore accepted strict financial covenants. If Astelit fails to reach its financial targets it may breach its financial covenants. There will be a new entrant in the Ukraine mobile market in 2006, and its entrance into the market could lead to our expected market share, number of new subscribers and ARPU level targets not being achieved. Additionally, the privatization of Ukrtelecom is on the agenda of the government and this could lead to increasing competition. Turkcell is the guarantor for up to $150 million of the principal and accrued costs and expenses of the subordinated loan. In the event of a default by Euroasia Telecommunications Holdings B.V., the lenders may choose to enforce the guarantee, which could have a material adverse effect on our financial condition. Finally, if we have conflicts in the future with our local partner in Euroasia, the company that controls our Ukrainian operations, such shareholder disputes may block the ability of Astelit’s management to move forward with its business plan.

Our international operations may not benefit us in the way we expect for the reasons cited above, as well as other reasons, including general macroeconomic conditions, poor management and legal, regulatory or political obstacles.

16

We have financial exposure relating to outstanding receivables from Digital Platform Iletisim Hizmetleri, A.S.

Digital Platform Iletisim Hizmetleri, A.S. (“Digital Platform”), a direct-to-home digital broadcasting company that is owned by the Cukurova Group, holds the broadcasting rights for the Turkish Super Football League until May 2008.

On December 23, 2005, “Restructuring Framework Agreement” has been signed between Digital Platform and us. The Agreement includes the restructuring of our receivables from Digital Platform amounting to $88.6 million as of December 31, 2005 and the purchase of sponsorship and advertisement services on Digital Platform infrastructure. As per the agreement, Digital Platform commits to pay its payables to us until July 15, 2011, along with the interests that will accrue within the repayment period, partially by cash and partially by rendering sponsorship and advertisement services as per the agreement. We currently believe it is unlikely that we will not recover our receivables. However, our collection capability is dependent on Digital Platform’s operations continuance. In addition to the receivables from Digital Platform as of December 31, 2005, we had a risk of $5.4 million from corporate guarantees we have given on behalf of Digital Platform on various lenders. As of today, all related outstanding loans have been paid by Digital Platform and the corporate guarantees have been released.

Spectrum limitations may adversely affect our ability to provide services to our subscribers.

The number of subscribers that can be accommodated on a mobile network is constrained by the amount of spectrum allocated to the operator of the network and is also affected by subscriber usage patterns and network infrastructure. Spectrum is a continuous range of frequencies within which the waves have certain specific characteristics and we only have 10 MHz of spectrum in the 900 MHz band. As our subscriber base and service offerings increase, there will be a need for more capacity for mobile voice and data; however, with the currently available spectrum, we may face a bottle neck, especially in the metropolitan areas. To overcome this bottle neck, in 2005 we employed the latest technology in our network, particularly in the metropolitan areas in order to increase the effective carrying capacity of the given allocations of spectrum. There can be no assurance that we can obtain additional frequencies in the 900 MHz band or additional spectrum in the 1800 MHz band at reasonable cost or at all, or that such additional frequencies will not be awarded to our competitors. Achieving enough spectrum capacity to ensure long-term provision of quality services may only be possible with a 3G/Universal Mobile Telecommunications System (“UMTS”) infrastructure.

The communications industry is subject to rapid and significant changes in technology that could reduce the appeal of our services or require us to increase our capital expenditures.

In the last decade, the growth in the telecommunication industry has been fueled by internet, multimedia and cellular mobile technologies. New technologies in the mobile phone service area requiring high data throughput, like streaming and video services, will be a likely avenue for growth in the future. Due to increasing competition we could finally come to the technical limitations of GSM, which will precipitate the need for increased capital expenditure due to the low or medium data speeds and capacity limitations of GSM.

GSM could also face competition from different technologies, especially in the wireless data field. As wireless data access, such as WLAN and WiMax, become the preferential technology of U.S. suppliers and as public WLAN applications become increasingly popular in Europe, reliance on General Packet Radio Services (“GPRS”) traffic may be diminished. Due to this technology, many GSM operators in the world, although not Turkcell, actually operate in the public WLAN hot-spot business to increase the variety of access types and regulate their incoming data traffic. We also face regulatory limitations in the area of WiFi technology due to conditions imposed on us by our license agreement which could hinder our ability to enter this market. Specifically, our license agreement limits the types of services that we may provide,

17

including public WLAN installations, and requires us to obtain permission from the Telecommunications Authority prior to providing such services.

Also, voice communication seems to be influenced by GSM/WLAN convergence which is presented as a new business model for the communications market. Under this model, as the user enters WLAN coverage at his home or office, his handset seamlessly switches over WLAN to use voice over Internet protocol, or VoIP, technology instead of GSM. We are also restricted from carrying any other traffic other than GSM due to the terms of our license agreement with the Turkish government. Turk Telekom and Avea may jointly develop a GSM/WLAN system which could increase our churn if they succeed in taking subscribers from us with such a business.

If the granting of 3G licenses is delayed further, the only solution for broadband services is to speed-up the coverage of Enhanced Data Rates for GSM Evolution (“EDGE”) technology under our radio network. We have already launched commercial EDGE services, but in the case of long delays in the granting of 3G licenses, any inadequacy in EDGE coverage or quality problems in data rates may create dissatisfaction for heavy data users. Additionally, if we cannot obtain a 3G license, further frequency problems and possible damage to our brand and reputation could occur. Furthermore, utilization of CDMA2000 technology in the IMT2000 band or the 450 MHz band is another potential threat, although not currently so utilized in Turkey. CDMA2000-EV-DO coverage in the 450 MHz band has a large cost advantage over the 900 MHz band in the provision of data services. This cost advantage reflects directly on the price of a subscriber’s mobile data tariff.

We face constant competition from communications technologies that are either under development or that will be developed in the future, such as WLAN or 3G generation mobile telecommunications. We cannot currently predict how emerging and future technological changes will affect our operations or the competitiveness of our services, nor can we be certain that new technologies to support our planned services will be available when expected or that customer demand will develop as expected. Similarly, the technologies that we employ may become obsolete or subject to intense competition from new or alternative technologies in the future, which may require us to undertake significant additional capital expenditures to remain competitive or could cause us to lose market share.

There can be no assurance that the other operators with whom we have entered into interconnection agreements can or will be able to perform their obligations under these agreements.

Our ability to provide commercially viable telecommunications services depends upon our ability to interconnect with the networks operated by the other telecommunications operators in Turkey in order to complete calls between our subscribers and parties on the Turk Telekom fixed line network or other mobile telecommunications networks in Turkey. If these other operators do not provide us with reliable, quality interconnections with sufficient capacity on a consistent basis, this could have a material adverse effect on our quality of service. See “Item 4B. Business Overview—Regulation of the Turkish Telecommunications Industry—Turk Telekom, Telsim, Avea, Milleni.com and Globalstar Interconnection Agreements—Turk Telekom Interconnection Agreement” and “—Agreements concluded with the Operators Licensed to Provide International Transit Traffic Services”.

There are alleged health risks related to base transmitter stations and the use of handsets which could expose us to liability and lead to reduced usage of mobile phones.

We are aware of allegations that there may be health risks associated with the effects of electromagnetic signals from base transmitter stations and from mobile telephone handsets. While there is currently no substantiated link between exposure to electromagnetic signals at the level transmitted by our base transceiver stations and mobile telephone handsets and long-term damage to health, the actual or perceived health risks of mobile communications devices could adversely affect us through a reduction in subscribers, reduced usage per subscriber, increased difficulty in obtaining sites for base stations and

18

exposure to potential liability. Furthermore, we may not be able to obtain insurance with respect to such liability on commercially reasonable terms. In recent years, legal proceedings have been brought against GSM mobile operators seeking the removal of base station sites for health reasons. Such legal proceedings may make it more difficult for us to establish and maintain such sites.

We are dependent on certain suppliers for network equipment and for the provision of data services.

We currently purchase all of our GSM network equipment, including switching equipment, base station controllers and base transceiver stations, and our network software from a small number of suppliers. Although our GSM network utilizes standard equipment, which is produced by several suppliers, and we are not bound to purchase our equipment solely from any given supplier, there can be no assurance that we will be able to obtain equipment from one or more alternative suppliers at comparable prices or on a timely basis in the event that any supplier is for any reason unable or unwilling to satisfy our equipment requirements, especially if the growth in demand for network equipment exceeds the ability of suppliers of this equipment as a whole to meet such demands. We may not be the preferred customer of suppliers, which would mean that our competitors might get exclusivity over certain equipment and services. In addition, equipment from alternative suppliers may not always be compatible with our existing equipment, and our employees may not be familiar with the technical specifications of equipment from alternative suppliers. The failure of any of our suppliers to supply equipment to us could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

If we are unable to retain key personnel, our business, consolidated financial condition or results of operations could be materially and adversely affected.

Our performance depends to a significant extent on the abilities and continued service of our key personnel. Competition for qualified telecommunications and information technology personnel in Turkey is intense. The loss of the services of these key personnel could adversely affect our financial condition or results of operations, particularly if a number of such persons were to join a competitor.

We face financial risks in the event that our majority owned subsidiaries fail to meet some of their obligations set forth in the agreements related to their financing arrangements or they require additional financing.

On December 30, 2005, our majority owned subsidiary, Astelit, together with the two mandated lead arrangers ING Bank N.V. and Standard Bank London Ltd., finalized a syndicated long-term project financing of $390.0 million. Astelit is the borrower and Euroasia is the guarantor. We expect that the syndicated long-term project financing of $390.0 million will be repaid when due in December 1, 2011. In the event of any default by Astelit under this financing, Euroasia may become liable for Astelit’s obligations under this financing. Through Euroasia, Turkcell is the guarantor for up to $150 million of the principal and accrued costs and expenses of the financing Astelit obtained. In addition, we may be required to contribute additional funds to Euroasia and Astelit in the event that they require additional financing. Any requirement on Euroasia’s part to meet Astelit’s obligations under the long-term project financing or any requirement for us to contribute additional funds to Astelit or Euroasia may have a material adverse effect on our Ukrainian operations and our financial condition.

Issuance and cancellation of ADSs has been indefinitely halted and this may affect our ability to make in-kind distributions on our ADSs and long-term may adversely affect ADS liquidity and trading.

Due to the uncertainty surrounding the application of a Turkish capital gains tax imposed from January 1, 2006, our ADR Depositary, Morgan Guaranty Trust Company of New York, has indefinitely halted issuance and cancellation of ADRs. We understand the depositary banks for all the Turkish DR programs (ADRs and GDRs) have taken similar action. Trading of our ADSs on the New York Stock Exchange has continued and purchases and sales of ADSs represented by ADRs are being settled and

19

recorded by the Depositary. We understand a number of depositary banks are making representations to the Turkish government to clarify the situation.

During the period that issuance and cancellation of ADSs is halted, we may not be able to make distributions of additional ADSs representing a dividend in bonus shares, as we have in the past. It is anticipated that a bonus share issue of 18.605586% per share may be approved at the April 28, 2006 Annual General Meeting for distribution on and after May 31, 2006. If the Depositary is unable to distribute additional ADSs, it may be required to sell the bonus shares in the Turkish market and distribute the net cash proceeds.

If the halt in ADS issuance and cancellation continues, and if for any reason there were a sudden or significant increase in persons wishing either to sell or to buy ADSs at the same time, there may be adverse effects on liquidity and market disruption in the trading of our ADSs.

Finally, it is unclear whether this halt in the issuance and cancellation of ADSs has produced any adverse impact for US federal income tax purposes. See “Taxation—United States Federal Income Taxation”.

ITEM 4.                INFORMATION ON THE COMPANY

4.A   History and Development of the Company

Turkcell Iletisim Hizmetleri A.S., or Turkcell, a joint stock company organized and existing under the laws of the Republic of Turkey, was formed in 1993 and commenced operations in 1994. Our principal founding shareholders are Sonera Holding, formerly known as Telecom Finland Ltd., and currently owned by TeliaSonera, the Cukurova Group and Alfa Group (through its Altimo subsidiary). The address of our principal office is Turkcell Iletisim Hizmetleri A.S., Turkcell Plaza, Mesrutiyet Caddesi, No. 153, 34430 Tepebasi, Istanbul, Turkey. Our telephone number is +90 (212) 313 10 00. Our website address is www.turkcell.com.tr. Our agent for service of process in the United States is CT Corporation, 111 8th Avenue 13th floor, New York, New York 10011.

We operate under a 25-year GSM license, which we were granted in April 1998 upon payment of an upfront license fee of $500 million. At this time we also entered into an interconnection agreement with Turk Telekom providing for the interconnection of our network with Turk Telekom’s fixed-line network which was amended on September 20, 2003. Under our license, we pay the Turkish Treasury a monthly ongoing license fee equal to 15% of gross revenue. Of that monthly ongoing license fee, 10% goes to the Ministry of Transportation as Universal Services Fund. Under the interconnection agreement between us and Turk Telekom, our network is interconnected to the Turk Telekom fixed-line network.

From 1993 until April 1998, we operated under a revenue sharing agreement with Turk Telekom. Under the revenue sharing agreement, Turk Telekom contracted with subscribers, set tariffs, performed subscriber billing and collection, assumed collection risks and gave us access to Turk Telekom’s communication network. We were entitled to receive 100% of the fees received from subscriber identity module card, or SIM card, sales but only 32.9% of fees billed for connection, monthly fixed fees and outgoing calls and 10% of fees billed for incoming calls, an arrangement that resulted in payment to us of approximately 25% to 30% of the net system revenues generated by subscribers of our GSM network.

In July 2000, we completed our initial public offering with the listing of our ordinary shares on the Istanbul Stock Exchange and our American Depositary Shares, or ADS’s, on the New York Stock Exchange.

Our subscriber base has grown from 63,500 at year-end 1994 to approximately 27.9 million at the year-end 2005. As of March 31, 2006, our subscriber base was approximately 28.7 million. In 2005, we had total

20

revenues of $4,269 million, our EBITDA totaled $1,933 million, and we reported net income of $911 million.

For the year ended December 31, 2005, we spent approximately $778.6 million for capital expenditures compared with $486.7 million in 2004 and $172.9 million in 2003, respectively.

4.B   Business Overview

Based on our estimates and announcements made by the Telecommunications Authority, we are the leading provider of mobile services in Turkey in terms of number of subscribers. We provide high-quality mobile voice and data services over our GSM network. We have developed one of the premier mobile brands in Turkey by differentiating ourselves from our competition in areas such as quality of service. As part of our focus on subscriber service and subscriber growth, we have introduced a wide range of mobile services for various subscriber needs in order to attract new customers and retain existing ones.

Through a state-of-the-art GSM network, we provide comprehensive coverage of an area that as of December 31, 2005 included 100% of the population living in cities of 5,000 or more people, as well as 99.88% of the population living in cities of 3,000 or more people, as well as the 81 largest cities and the majority of the country’s tourist areas and principal intercity highways. As of March 31, 2006, we provided service to our subscribers in 188 countries through roaming agreements with 501 operators.

Industry

Overview

GSM, currently one of four basic digital standards for mobile communications, was developed in 1987 in order to facilitate unification and integration of mobile communications within the EU.

As a digital standard, GSM offers a wide range of services that include voice, circuit switched data, packet data and fax, in addition to standard service offerings such as call barring, call forwarding, call waiting and roaming into areas serviced by other GSM carriers. A key component of the GSM network is the SIM card, which enables the user of a mobile phone to be identified. Because the identity of the subscriber is held on the card, any mobile phone can be used in conjunction with the SIM card. Without a valid SIM card, mobile phones do not function.

GSM networks have traditionally been used exclusively as personal voice communications networks. The mobile telecommunications industry is increasingly providing mobile data services, and GSM, as a technology platform, is suitable for data transmission. Currently many advanced technology platforms are being developed to enable the provision of more sophisticated data service.

Today most GSM operators, in addition to the standard data service of 9.6 kilobits per second, also offer new technology standards such as High Speed Circuit Switched Data (“HSCSD”) and GPRS, which provide for network speeds of up to 57.6 Kbs and 160 Kbs, respectively, depending on radio network and mobile phone conditions. EDGE and UMTS provide the means for making networks suitable for high-speed wireless data services. EDGE and UMTS platforms allow network speeds of up to 240 Kbps and 2 Mbps, respectively. By utilizing the new radio access technology High Speed Downlink Packet Access (“HSDPA”) in UMTS networks operators gain increased capacity and improved downlink speeds up to 14 Mbps. Most of the countries in Western Europe have already granted UMTS frequency band licenses to operators. Those operators have started to offer advanced multimedia services to their customers.

The Turkish Mobile Market

Turkey’s population was estimated to be 73.4 million as of December 31, 2005. The Turkish population is young with an estimated average age of 29, which is lower than elsewhere in Western

21

Europe, and the majority of the population lives in urban areas. In our opinion, these factors indicate growth potential for the mobile communications market in Turkey.

There are currently three mobile communications operators in Turkey: Turkcell, Telsim, and Avea and a total of 43.6 million GSM lines as of December 31, 2005 according to figures published by the Telecommunications Authority.

Telsim, our principal competitor, received a 25-year license at the same time as we did on what we believe are identical terms, including the $500 million upfront license fee. Telsim was put up for sale by the Savings Deposit Insurance Fund (“SDIF”) in August 2005, and an auction was held for Telsim on December 13, 2005 with Vodafone submitting the winning bid of $4.55 billion. The draft concession agreement prepared by the Telecommunications Authority is currently under review by the Danistay (the highest administrative court). The agreement will then be signed by Vodafone and the Telecommunications Authority before final approval by the SDIF, after which the sale will be complete.

In November 2004, the Turkish Privatization Agency announced that 55% of Turk Telekom, which owns 40% of Avea’s shares, would be privatized through a “block sale”. The public auction for 55% of Turk Telekom was concluded on July 1, 2005. The winning bid was made by Oger Telecom’s consortium comprised of Oger Telecom, Telecom Italia and BT Consult, for $6.55 billion, payable over 5 years and totaling $7.4 billion with interest. The sale of the 55% stake in Turk Telekom to Oger Telecom was completed on November 15, 2005.

Strategy

Our vision is to enrich and facilitate life of our subscribers. In line with this vision, our mission is to connect our customers to life by creating value added communication services and providing creative communications solutions.

In order to achieve our vision and mission, we have adopted the following key strategic priorities:

Enhance Customer Focused and Customer Relationship Management (CRM) Approach

Since our inception, our business approach has been shaped by subscriber needs and expectations. The loyalty of our customers is very important and we use a customer oriented approach to maintain the loyalty of our customers in a market with increasing competition and changing economic conditions. Our CRM program and customer focus play an important role in the management of different marketing campaigns and services for different subscriber segments and in attracting potential subscribers. Through the effective management of our CRM program, we aim to:

·       maintain subscriber acquisition market share;

·       focus on retention; and

·       strengthen the perception of  ‘better value for money’ among our subscribers

22

Provide Superior Products and Services

We believe that the quality of our network, measured in terms of network coverage and capacity, has been an important factor in the successful provision of new and superior products and services to date. We intend to maintain our high quality network and to upgrade our networks to further facilitate the introduction of more sophisticated data services.

We intend to facilitate increased GSM usage among our existing subscribers and to foster the growth of new GSM subscribers in Turkey by offering value added services and by allowing our subscribers to access a wide range of services through our network.

Focus on Cost Control and Efficiency

In 2005, we continued to focus on cost management and increased the efficiency of our operations without adversely impacting our ability to deliver high quality products and services to our subscribers.

Services

Voice Services

We currently provide high-quality wireless and value added mobile communications services to subscribers throughout Turkey. Subscribers can choose between our postpaid and prepaid services. Currently, postpaid subscribers sign a subscription contract, but are not bound to a minimum subscription period, and receive monthly bills for services. The prepaid service is positioned with two brands, “Hazir Kart” (“Ready to Go Card”) and “Muhabbet Kart” (“Chat Card”). Prepaid subscribers must purchase a starter pack which consists of a SIM card and inclusive airtime of up to 250 counters. Scratch cards can be purchased in increments of up to 1000 minutes.

Our postpaid and prepaid voice services include network access, call forwarding, call holding, call waiting, call barring, caller ID presentation (“CLIP”) and caller ID restriction (“CLIR”), dual numbering, twin card, high memory SIM card options, international roaming, Mobile Virtual Private Network (“MVPN”, a system that links separate sites to one network enabling subscribers to make calls and send data; a company wide numbering system with short code dialing for convenience and speed is used) and services such as teleconferencing, voice mail, call alert, collect call service, unified messaging, SMS, MMS, WAP over GPRS, HSCSD and CSD, mobile internet, directory service, a financial information line, a general information line, bill query over SMS, SMS over web, bulk SMS, fleet management, m-commerce, m-payment and m-marketing services.

As of December 31, 2005, we had approximately 22.5 million prepaid subscribers and 5.4 million postpaid subscribers, compared to approximately 18.2 million prepaid and 5.1 million postpaid on December 31, 2004. The number of prepaid subscribers has increased to 23.3 million and the number of postpaid subscribers to 5.4 million as of March 31, 2006.

Value Added Services

We intend to increase GSM usage among our existing customers and to foster the growth of new GSM customers in Turkey by offering our customers new value added services and new ways to access our wide range of rich content and services. One of our main goals is to provide both our individual and corporate customers with easy to use, convenient services and rich content to make life easier for them. We aim to increase our customers’ efficiency and enhance their lives with the right offers fitting their specific needs.

23

We established a new organizational structure called Value Added Services Management in 2005 to better focus on these specific needs and offer tailored services accordingly. The new organization is now one of the main pillars of the overall Turkcell Organization.

The Value Added Services Management is focusing on developing and managing services to address customers’ different needs and enrich their lives. Our goal is to continue to follow an integrated service approach with a common vision to offer the right solutions based on our customers’ preferences.

We currently offer such value added services as SMS, MMS, Unified Messaging, E-Mail Solutions (TurkcellE-Posta (with turkcell.com domain) and push e-mail solutions like Blackberry and TurkcellE-Postaci), Instant Messaging, Connect Card, RingBackTone, Mobile Video, Mobile Music, Logo, Ringtone, Chat, Java Games, Info and Entertainment services, Location Based Services, Advisory WAP Services and Mobile Payment.

Our aim is to continue positioning our new products and services based on needs and expectations of our customers to promote mobile usage, increase awareness of our value added services through trials and bundled offers and increase penetration of our services while easing daily life.

Data Services

In line with the global trends of increasing data revenue percentage as a percentage of total revenues of GSM operators, Turkcell is actively pursuing new opportunities to make data services a major part of customers’ daily business and private life. This strategy is realized through innovative services and creative charging scenarios which seek to make regular use affordable for all segments of our subscribers.

We introduced EDGE technology into the Turkish market in 2005. Enabling up to three times faster mobile data access compared to GPRS, EDGE is a key ingredient for the enrichment and enlargement of Turkcell’s mobile data services portfolio. EDGE coverage has reached 50% of Turkcell’s network.

While improving the overall mobile data access experience, EDGE also enabled music and video download and streaming services. MobileMusic and MobileVideo download services were launched in June 2005 and live streaming was demonstrated during the Cebit Bilisim Fair in September 2005. For the corporate segment, in March 2005, a solution for laptop users was introduced as TurkcellConnectCard, consisting of a PCMCIA GPRS/EDGE/WLAN data card and necessary client software, delivering a plug and play user experience for both data and messaging services, and including a promotional 5 MB free monthly usage for 12 months.

In addition to Internet access, TurkcellConnectCard also supports secure access to corporate data networks through Corporate GPRS solution. Corporate GPRS solution is commonly used for access to corporate Intranets, Sales Force Automation, Sales Force Support, Fleet Tracking and mobile Point of Sale (POS).

In mobile e-mail solutions, Turkcell introduced the well-known real-time push e-mail solution, Blackberry, into the corporate market in August 2005. This was followed by the launch of TurkcellE-Postaci, a non-professional, consumer market push e-mail solution. With a large customer base, Turkcell is continuing to look for alternative e-mail solutions addressing the needs of every segment.

We introduced two new mobile data services during 2005, TurkcellWapBlog and M-Government. Turkcell WapBlog service brings the blog phenomenon to mobile terminals with the convenience of ubiquity, anywhere anytime access. Turkcell WapBlog allows Turkcell customers to publish their journals on WAP pages served by Turkcell for free and share it with all Turkcell users. M-Government WAP service allows easy access to governmental web sites for inquiries about personal identification numbers, social security numbers and payments, tax office numbers, and vehicle related information such as traffic

24

fines and taxes. These new  mobile data services help us make our customers’ lives easier and create a community for social networking.

“Prepaid Counter Transfer” service became our most widely used value added service during 2005. This service allows prepaid and postpaid customers to transfer counters to other prepaid customers.

We also demonstrated SmartHome mobile extensions during the Cebit Bilisim Fair as a concept project. The SmartHome demonstration consisted of remotely controlled home appliances such as oven, refrigerator, dishwasher and house lighting and powered curtains. The SmartHome demonstration showed how new technologies can be put to everyday use, while seeking to strengthen Turkcell’s innovative image.

Content Services

We aim to shape, enlarge and improve the Value Added Services (“VAS”) market and to familiarize customers with our current service structure. Content based services are a subset of VAS which contain branded and/or non-branded content. Some examples of content based services are RingBackTone, Mobile Video, Mobile Music, Logos and Ringtones, Chat, Java Games, Info and Entertainment services, Yellow Pages Wap Service, Question and Answer etc.

Turkcell Yellow Pages WAP Service (Location Based Service)

Yellow Pages WAP Service is a WAP page that provides address information of Points of Interests (“POIs”) that are being looked for or the nearest POI meeting customers’ particular needs. With the Turkcell Yellow Pages service, it is possible for customers to find, for example, the nearest gas station or the phone number of a restaurant in the city.

Turkcell Question and Answer (Advisor)

Turkcell Question and Answer is an innovative information service. Clients simply text a question to number “4500” without a limitation of keyword or sentence, and they receive the answer from live operators via SMS 24 hours a day. The service helps customers enjoy immediate access to information about the contact details of corporations, operator services, movie showtimes, weather and traffic conditions etc.

RingbackTone (“RBT”)

The RBT is the tone heard by someone who calls your telephone number. Our RBT service allows our customers to replace the standard RBT with a personalized sound chosen especially for the person calling. The personalized RBT can be a pop song, a message recorded by the subscriber, a corporate advertisement, a joke, etc. Our customers can subscribe and unsubscribe to the service via web, WAP, SMS, or IVR (Interactive Voice Response).

We offer a number of RBTs in different categories including Fun, Pop and Soundtracks. We also provide a popular name RBT service where customers send their names via text message and a song written to their name is set as their RBT. RBT appears to be an increasingly popular service.

Messaging Services

Turkcell has been developing new messaging services based on customers’ requirements and expectations. Beginning with Turkcell’s SMS service, Turkcell has enriched its messaging services offerings with TurkcellMMS, TurkcellMessenger and TurkcellE-Posta services. Turkcell focuses on increasing the usage and penetration of messaging services by enriching the customer experience and through campaigns and offers to target customers. The description and main strategies followed for Turkcell SMS, TurkcellMMS, TurkcellMessenger and TurkcellE-Posta are as follows:

25

Turkcell SMS allows Turkcell customers to send short messages (SMS) to each other. The service offers various advantages like special campaigns for young segment customers, economical packages and optional tariffs for postpaid users.

TurkcellMMS adds color, sound, and animation to plain text messages. With TurkcellMMS, users can share their pictures and videos with each other. As an incentive to try MMS, Turkcell offers try-for-free campaigns and free-of-charge picture messages.

TurkcellMessenger is a community service that allows users to send instant messages to each other. Through peer-to-peer & group messaging, picture messaging, multiple chatting through personal and general chat rooms and also infobuddies features, TurkcellMessenger aims to provide an enjoyable mobile environment to users. TurkcellMessenger targets young users and students with an “Always online” strategy, allowing them to stay in touch both by PC and GSM.

TurkcellE-Posta offers customers an email messaging service with the @turkcell.com extension, 50 MB capacity and an Internet interface which is easy to use. By adjusting mobile phones’ POP3 settings, the customers can read, and send their e-mails via this service and also an alert is sent to the user’s mobile when there is a new e-mail in the box of the user.

Emerging Services (Business Development)

We continuously seek to extend our product range through the introduction of new services to be able to better meet the needs and demands of our customers. Turkcell continues to build on its technical competencies and market know-how to expand its existing rich services portfolio We closely follow and analyze global trends and develop services best fitting local market needs. Creating synergies with partnerships with various sectors such as finance, retail, transportation, media, etc. to offer innovative services is becoming crucial in our business. Turkcell Mobile Payment and Visual Radio are some of the new services developed through such cooperation. New VAS enhance the user experience and seek to ease their daily life.

Mobile Payment

Usage of alternative payment methods and importance of mobile payment technology is increasing globally. In parallel to global trends Turkcell moved first in Turkey to offer this kind of comprehensive service utilizing credit cards issued in Turkey for micro and macro payments.

“Turkcell Mobile Payment” is a new service offering a convenient tool for customers to use their credit cards for remote transactions over mobile phones at various merchants via SMS, WAP, IVR and Internet. With this service, Turkcell creates an additional channel for its customers to use their credit cards for their different payments. The aim is to offer an easy to use, secure and simple service to help Turkcell customers use credit cards without having to physically carry them. Convenience, security, simplicity and mobility are the main service propositions. All credit cards issued in Turkey can be used in the system. The system hosts a number of merchants from different categories such as online shopping, transportation, electronics consumer goods, vending machine, catalog shopping, fast food restaurants and the like.

Visual Radio

Turkcell partnered with Hewlett Packard and Nokia to launch the Visual Radio service, an enhanced radio experience supporting visual content and interactivity, in 2006. Turkcell expects to be among the first European operators and also the first mobile phone operator in Turkey providing the service.

The new service will enable Turkcell customers to download content related to radio broadcasts, receive detailed information and graphics regarding songs that are playing on the radio, and participate in quizzes.

26

Parallel to the FM radio broadcasting function of handsets, the “Visual Radio” service makes graphical and interactive radio service possible, which enables users to download content related to radio broadcasting and view the name of the song and singer synchronized with the broadcast.

Future Services

Third Generation Mobile (3G)

Turkcell currently offers GSM and GPRS countrywide and offers EDGE in certain regions of the country. GPRS and EDGE allow greater opportunities for improved data and voice services over our previous services, provide a platform for the introduction of mobile Internet services, and pave the way for third generation (3G) networks. The 3G technology, which offers full interactive multimedia, is expected to bring mobile networks significantly closer to the capabilities of fixed-line networks and allows for the introduction of high volume-based data services like video telephony.

In the near term, High Speed Downlink Packet Access (HSDPA), also called 3.5G, could be the most important technology to increase the capabilities and competitiveness of 3G. Most vendors have already declared that their 3G products will be ready to deploy HSDPA by upgrading software for higher data speeds.

Multimedia services will likely feature prominently in 3G networks, and may include, in addition to conventional mobile voice and data services: high speed Internet and intranet access, video telephony and conferencing, mobile TV, entertainment, information and high precision location services, and direct instant access to home or office IT systems.

Turkcell’s ability to implement the 3G services described in this section will be dependent on clearing 3G regulatory and licensing process. There is currently not enough clarity on the exact timing or the process by which 3G licenses will be awarded in Turkey. However, it is expected that 3G licenses will be awarded sometime during 2006 based on statements of the Telecommunications Authority. Turkcell believes that 3G services will be important for its business and intends to participate in the 3G licensing process if it commences. 3G operators may be operational in 2007.

Other Services

International Roaming

Today, our coverage extends to many countries in Europe, Asia, Africa and North and South America. As of December 31, 2005, we offered our subscribers international roaming in 185 destinations around the world, pursuant to commercial roaming agreements with 486 operators. As of March 31, 2006, we offered our subscribers international roaming in 188 destinations around the world, pursuant to commercial roaming agreements with 501 operators.

Since July 2002, we have been providing roaming services for the prepaid subscribers of foreign mobile operators visiting Turkey. We were the first operator to provide such a service in Turkey. This service, called “passive CAMEL”, can only be enabled if both operators have installed CAMEL system on their networks. As of December 31, 2005, we offered prepaid roaming to the prepaid subscribers of 104 operators in 58 destinations. As of March 31, 2006, we offered prepaid roaming to the prepaid subscribers of 116 operators in 66 destinations. Since October 2004, we have offered roaming services for Turkcell prepaid subscribers going abroad. This service, called “active CAMEL”, can only be enabled if both operators have installed the CAMEL system on their networks. As of December 31, 2005, we offered prepaid roaming to Turkcell prepaid subscribers through 82 operators in 51 destinations. As of March 31, 2006, we offered prepaid roaming to Turkcell prepaid subscribers through 104 operators in 65 destinations.

27

Since October 2002, we have offered GPRS roaming. As of December 31, 2005, we had 234 GPRS roaming partners in 88 destinations. We have signed 251 GPRS roaming addendums, or extended service agreements, to enrich the GPRS roaming availability. As of March 31, 2006, we offered our subscribers GPRS roaming through 252 operators in 96 destinations.

In order to balance international SMS traffic, we started to sign international SMS Interworking Agreements with other mobile operators in April 2002. As of December 31, 2005, we had signed 129 International SMS Interworking Agreements. As of March 31, 2006, our subscribers can send SMS to 494 mobile operators located in 186 destinations including 130 CDMA/ TDMA operators in North America.

Tariffs

Our charges for voice, messaging, and data consist of monthly fees, usage prices, bundles, and volume discount schemes and options under various tariff schemes. Our license agreement provides that the Telecommunications Authority sets the initial maximum tariffs, after consultation with us and the consideration of tariffs applied abroad for similar services. Thereafter, the maximum price levels are adjusted based on increases in the Turkish Consumer Price Index. The increase applied to the price cap is 97% of the increase in the index. For more information on how our maximum price levels are established see also “—Regulation of the Turkish Telecommunications Industry.”

Each customer subscribes to a voice tariff. Voice tariff packages vary based on type of subscriber (postpaid or prepaid, corporate or individual), time and destination of call, and call volume. Although current list price levels for on-net calls in our tariffs are more than twice as expensive as fixed-line local call prices, some of our discounted rates are below these prices.

Price focused competition, with aggressive competitor offers aimed at subscriber acquisition and increased usage continued in 2005. Our pricing strategies are based on various segment based offers rather than direct discount strategies, continued emphasis on “better value for money” and maintaining the correct balance between customer expectations and achieving revenue goals.

Main Tariffs

The main tariffs listed below for postpaid and prepaid subscribers are as of March 31, 2006 (US dollar amounts are based on the March 31, 2006 exchange rate of TRY 1.3417 = $1.00). Prices for prepaid BizbizeCell are based on the 100 counter card price level.

28

·       February 2006 averages show that a majority of our subscribers - approximately 71% of our postpaid subscribers and 91% prepaid - are on the BizbizeCell Super On Net tariff.

·       StandartCell, the standard Turkcell tariff to which 7% postpaid and 3% of prepaid customers subscribe.

·       Turkcellici, a corporate tariff with a structure similar to BizbizeCell, is our third largest postpaid tariff with 6% of the total postpaid subscriber base.

·       KampusCell, a community tariff for students, revised in May 2005 to allow high school students to be a member of this family in addition to university students.

·       Toplukontorcell, a package for corporate prepaid subscribers that creates cost advantages for corporate users, as counters can be purchased in bulk and distributed among users.

Other tariffs offered to subscribers are as follows:

·       KademeliCell, a daily volume tariff,

·       Support Tariff, a special tariff for disabled subscribers, and

·       KamuCell, a new tariff with which public sector employees can speak among themselves at reduced prices and also invite three other Turkcell subscribers to join this community

The level of prepaid usage prices vary by the volume of counters purchased by the subscriber and they can choose from one of four scratch cards (100, 250, 500, 1000) and get a discount on cards with counters of 250 and above. Counter prices as of March 31, 2006 are as follows. These prices include 18% VAT but exclude 25% special communications tax.

Our emphasis on strengthening loyalty and promoting usage continued throughout 2005. We introduced new segmented offers in line with our “better value for money” approach.

Two similar free minute programs were introduced for postpaid consumer and corporate segments in 2005. “Dakikabizden” (Minutes from us) started for the consumer segment in May 2005. Subscribers, through registration, can earn free minutes according to the amount of their monthly bill. Minutes earned are given in installments over five months. “Kullandikca Kazan” (Win as you go), the corporate segment counterpart of “Dakikabizden”, was introduced in June 2005. The criteria for earning free minutes include the amount of the monthly bill and the number of Turkcell lines in the company. As with Dakikabizden, free minutes earned are given in installments over five months.

Similar to the free minute programs for postpaid subscribers, “Kontorbizden” (Counters from us) started for prepaid lines in May 2005. Kontorbizden allows customers to earn free counters from all refills. Free counters earned depend on the amount of counters purchased in one month. Up until March 31, 2006 customers were only able to spend free counters in installments over 5 months. As of April 1, 2006 a new more advantageous free counter spending system named Konbara (“Counter Bank”) was introduced. With Konbara, customers are able to spend 50 free counters up to twice a month.

29

A number of options for consumer and corporate segment customers that provide various advantages on top of their current tariff plans were also launched in 2005.

Roaming Tariffs

When one of our subscribers makes a call outside Turkey, we charge the subscriber the local or international rate charged by the local operator where the call is placed, as applicable, plus a surcharge. As of March 31, 2005, the mark-up surcharge rate was increased while the tax on international roaming services was decreased. The overall effect on customers has been positive, as the total price (including tax) for roaming services has decreased.

We do not charge foreign operators’ subscribers roaming on our network when they receive calls while in Turkey. When a roaming subscriber makes an outgoing call within our coverage area, that subscriber’s operator pays us our inter operator tariff (IOT) for the specific call type.

Churn

Churn rate is the percentage calculated by dividing the total number of subscriber disconnections during a period by the average number of subscribers for the same period. Churn refers to subscribers that are both voluntarily and involuntarily disconnected from our network. Under our disconnection process, postpaid subscribers who do not pay their bills are disconnected in 180 days as a result of the legal process. Subscribers are included in churn upon the commencement of the legal process to disconnect them, which occurs approximately 180 days from the due date of the unpaid bill. Pending disconnection, non-paying subscribers are suspended from service (but are still considered subscribers) and receive a suspension warning, which in some cases results in payment and reinstatement of service. Prepaid subscribers who do not reload units for a period of 210 days are disconnected and cannot reuse their numbers.

During the year ended December 31, 2004, our annual churn rate was 9.1%. For the year ended December 31, 2005, our annual churn rate was 10.1%. We have what we believe to be an adequate bad debt provision in our consolidated financial statements for non-payments and disconnections amounting to $133.9 million and $149.2 million as of December 31, 2004 and December 31, 2005, respectively. We expect the churn rate to increase due to increasing competition in 2006.

Seasonality

The Turkish GSM market is affected by seasonal peaks and troughs, the effects of which are reflected in our quarterly results and key performance indicators. In general, the effects of seasonality on GSM usage positively influence our results in the second and third quarter of the fiscal year and negatively influence our results in the first and fourth quarters of the fiscal year. Local and religious holidays in Turkey also generally affect our operational results.

Network

Coverage

Our GSM network is designed to provide high-quality coverage to the majority of the population of Turkey throughout the areas in which they live, work and travel. The build-out of our radio access network is now substantially complete, with coverage at December 31, 2005 of 100% of the Turkish population living in cities of 5,000 or more people. As of December 31, 2005, our network covers 99.88% of the Turkish population living in cities of 3,000 or more. Coverage also includes substantially all of the Mediterranean and Aegean coastline. We meet the coverage requirements of our license.

We have continued developing our network in order to improve quality and expand capacity. In urban areas, we have increased coverage and capacity by placing network infrastructure in building sites such as

30

shopping malls, business complexes and entertainment centers. The highest coverage density has been achieved in the major urban areas, especially in Istanbul.

We have also expanded our GSM network to add capacity to existing service areas and to offer service to new areas, including improvement of the existing urban, suburban, and intercity road coverage.

Network Infrastructure

We have largely employed experienced internal personnel for network engineering and other design activities while employing Ericsson as our supplier for network infrastructure and as our partner in product/service development. Ericsson installs the base station cell site equipment and the switches on a turn-key basis, while subcontractors employed by Ericsson perform the actual site preparation.

Our network consists of stand alone home location registers or SHLRs, base station controllers or BSCs, combined mobile switch centers/visitor location registers or MSC/VLRs, service control points or SCPs, and base transceiver stations or BTSs. BTSs are the fixed transmitter and receiver equipment in each cell, or coverage area of a single antenna, of a mobile communications network that communicates by radio signal with mobile telephones in the cell. Each BTS is connected to a BSC via leased lines and/or radio relay links called “minilinks.”  The base station controllers monitor and control the base transmitter stations. It is possible to cascade the BTSs to each other, thereby realizing considerable cost savings in transmission.

Capacity

We believe that we have sufficient bandwidth to serve our current and projected subscriber base and that we currently meet the capacity requirements of our license. To enhance the network capacity where congestion is a possibility, we intend to construct additional network sub-infrastructure, or implement technological advances that will permit bandwidths to be used more efficiently. In 2005, a number of techniques are employed to increase the effective carrying capacity of a given allocation of spectrum as well. We may need to request additional spectrum in the 900 MHz band from the Telecommunications Authority if we face further network capacity problems due to frequency spectrum limitations.

Core network capacity is continuously being enhanced by adding new nodes, processor upgrades and expansions to existing equipment in order to accommodate further increases in our subscriber base and the accompanying call handling and traffic capacity demands. In 2005, we made capital expenditures to improve existing capacity, replace some of the phased out hardware with ones offering higher capacity, provide increased network functionality, and improve network efficiency in order to better serve our customers.

We have started to implement EDGE technology in our network. EDGE is an evolution of the GSM technology which allows consumers to use cellular handsets, PC cards and other wireless devices at faster data rates up to 240 kbps. Actual data rates vary depending on the access network load at the connection time and the terminal device features used by customer. We implemented EDGE in September 2004 by upgrading existing BTS sites primarily in large hotels, airports, shopping centers and other areas experiencing high data traffic. As of December 31, 2005, approximately 50% of our network are EDGE-enabled and by the end of 2006, we aim to complete EDGE activation in 80% of our radio access network.

Network Maintenance

We have entered into several System Service Agreements with Ericsson Turkey. Under these agreements, Ericsson Turkey has agreed to service our GSM network, including hardware repair and replacement, software and system support services, consultation services and emergency services. Our

31

subcontractors perform corrective and preventative maintenance of our radio network in the field, although Ericsson repairs all the network equipment.

We have three regional operation units with qualified Turkcell staff that operate and maintain our network in three main geographical regions. In addition, the Turkcell Network Control Center located in Istanbul monitors our entire network 24 hours per day, 365 days per year, and ensures that necessary maintenance is performed in response to any problems.

Transmission Lines

Radio network transmission is either provided as leased lines from Turk Telekom or microwave radio links that we own and operate. As of December 31, 2005, approximately 85% of our BTS transmission is provided by microwave radio links and 15% is provided by the leased lines.

To expand our network coverage, we employ a High bit rate Digital Subscriber Line (“HDSL”) link for distances of up to 2.7 km (from the BTS site to the nearest Turk Telekom location) or radio link equipment for longer distance BTS connections where there is line of sight, for BTS transmission.

All of our switching equipment that forms part of our core network, including MSCs, Gateway MSCs, Tandem switches, HLRs and BSCs is located within buildings we own. Transmission between these sites is achieved through a leased Synchronous Digital Hierarchy (“SDH”) ring backbone network. As a result, we are better able to increase our capacity and establish new connections required for network expansion and architectural changes can be completed quickly.

Interconnections with other GSM networks and the PSTN network are realized with leased lines. Until December 31, 2003, we were required under Turkish law and regulations to lease all of our transmission lines from Turk Telekom primarily to the extent that Turk Telekom could satisfy our requirements. Turk Telekom’s monopoly ended at December 31, 2003. However, Turk Telekom is still the only operator that owns a nationwide fiber transmission network in Turkey. New operators that own a transmission network in Turkey may start up in 2006. If this happens we may have chance to work with different transmission services providers with price and service quality alternatives.

Site Leasing

Once a new coverage area has been identified, our technical staff determines the optimal base station location and the required coverage characteristics. The area is then surveyed to identify BTS sites. In urban areas, typical sites are building faces and rooftops. In rural areas, masts and towers are usually constructed. Our technical staff also identifies the best means of connecting the base station to the network. Once a preferred site has been identified and the exact equipment configuration for that site decided, we begin the process of site leasing and obtaining necessary regulatory permits.

Dropped Calls

Dropped calls are calls that are terminated involuntarily and are measured by using the ratio of total dropped calls during the most congested hour of network traffic during the relevant time period to the traffic intensity in that congested hour. Using this industry standard for dropped calls, our monthly dropped call rate has decreased from 1.27 per erlang for December 2003 to 1.02 per erlang for December 2004. As of December, 2005, our dropped call rate has further decreased to 0.75 per erlang.

Services and Platforms

We have an intelligent network and other service platforms enabling our services, such as:

·       Prepaid system enables advanced payment of the airtime to be used by prepaid customers.

32

·       Mobile Virtual Private Network (MVPN) is a service for enterprise customers which enables short number dialing between users and allows applying reduced tariffs to MVPN users groups.

·       Short Message Service (SMS).

·       Voice Mail.

·       Turkcell Uni-message, provides access to voice, fax, and e-mail messages from anywhere. It is possible to get new messages from the web, via e-mail or by fax machine. It also notifies subscribers about the new messages with SMS or e-mail.

·       Call Alert Service, provides information to the called party about callers, calling time(s) and number of calls. Information is sent with SMS messages.

·       GPRS supports packet data transmission in GSM networks that provides increased speed and efficiency in data and multimedia services. With the introduction of EDGE technology, data transfer speeds up to 240 Kbps are possible.

·       Mobile positioning provides location based services such as car fleet management, tracking, and yellow pages.

·       WAP gateway, providing both SMS circuit switched data and GPRS connection types (bearers) to Internet content, banking applications, and information services.

·       Multimedia Messaging Service Center (“MMSC”), which makes it possible to send and receive multimedia messaging including video clips, graphics, sound files and text messages.

·       Cell broadcast center infrastructure, which is to provide location based information like cell information, advertisements and public announcements like weather information.

·       Our Over The Air (“OTA”) platform supports SIM Tool Kit (“STK”) based services, which enable the operators to configure SIM card contents remotely. Similarly we have SIMGO platform which enables subscribers to benefit from customized offerings by making their own menus on SIM card.

·       GSM Point of Service (“GSM PoS”) infrastructure is used to handle credit card PoS applications through the GSM network.

·       Welcome Platform is used for information services for both international roamers in Turkey and Turkcell subscribers abroad.

·       USSD Gateways are servers to facilitate user interactive operator services such as reverse charging and m-payment.

·       Call Back Platforms enable enhanced voice services such as reverse charging.

·       Ringback Tone Platform enables personalized ringback tone service, which allows our customers to play personalized ringback tones to all or specific callers. It was launched at the beginning of 2005.

·       Messenger service enables subscribers to chat, just like other messenger services on the internet using mobile phones.

·       Push to talk service is offered by two different platforms due to unfinalized specifications work. Turkcell provides this service to subscribers having push to talk enabled Motorola handsets and Nokia handsets.

·       Mobile email is a new offering to customers. By having RIM blackberry devices, corporate subscribers may access their email online. Another offering is based on Visto solution which enables subscribers to access their email by installing a client application on their mobile phone.

33

·       Automatic Device Configuration is another new platform (“ADC”). This platform keeps track of each subscriber’s mobile device information. Using this information, the settings of the mobile device e.g. MMS settings, WAP settings are sent automatically when the subscriber changes the handset. This handset information may also be used by the service providers in order to offer services compatible with the subscriber’s mobile device.

We also provide secure and controlled access to the network for the content and service providers to give messaging and data services. This infrastructure is being improved to open up more capabilities of the network towards the application and content providers. New infrastructure also contains a portal where subscribers buy services, receive promotions and enroll for campaigns easily.

Business Continuity Management

Turkcell in 2000 launched its Business Continuity Plan (“BCP”) that encompassed Technical Operations, and sited Ankara Plaza as the Business Recovery Center. In 2004 the BCP was widened to cover all of Turkcell’s business functions to become Business Continuity Management (“BCM”), and its implementation was completed in July 2005. BCM was adopted as a full-time function. In the second half of that same year the BCM plan was tested with 14 different scenarios. As part of 2006 strategies, BCM plans will continue to be tested for the different business scenarios.

Looking at scenarios that may affect Turkcell’s operations, the purpose of BCM is to prevent or overcome these situations; to develop recovery and crises scenarios; to make sure Business Continuity planning continues and all key function staff are trained; to raise awareness and understanding of Business Continuity.

To this end, we established a Crisis Management Team, a Business Recovery Team and several Emergency Response Teams. The crisis management team is made up of top level management and manages the whole crises. The Business Recovery Team and Emergency Response Teams are located at several sites (HQ, Istanbul Asia site, Istanbul Europe site, Ankara site, Izmir site) and if need are ready to aid and assist various teams at 15 other sites. In the event that Turkcell’s operations are interrupted, in accordance with the area in which the crisis occurs, a chain alert call convenes the teams.

Sales and Marketing

Our nationwide distribution channels are an important asset that help to differentiate us from our competitors and achieve our sales targets. Our strong and extensive distribution network consists of dealers, and Turkcell Extras as well as points of sale for counters (airtime) including ATMs, POS, and kiosks.

The Sale of Mobile Services in Turkey

In Turkey, independent handset dealers serve as the primary point of mobile service sales. Subscribers generally must purchase a mobile phone from a dealer to commence services. We do not directly sell mobile phones nor do we expect to do so in Turkey. Mobile phones are imported into Turkey by third party importers and need an activated SIM card to operate. We sell SIM Cards and starter packs to distributors which are delivered to dealers and sales points directly from mobile phone importers which distribute the SIM cards, along with handsets, to dealers. Airtime scratch cards for Hazir Kart are sold through our exclusive and non-exclusive dealer networks, supermarket chains, gas stations, digital channels and other distribution points. Muhabbet Kart branded scratch cards, are sold through newspaper kiosks located throughout Turkey.

16K, 32K and 64K SIM cards are in circulation in the market; 64K SIM card starter packs are only sold with an inclusive 250 counters whereas 16K and 32K starter packs are sold with 100 counters.

34

Turkcell Sales Efforts

We sell postpaid and prepaid services to subscribers through our distribution network, which is composed of distributors, exclusive and non-exclusive dealers and TurkcellExtra shops which totalled in excess of 11,500 sales points as of December 31, 2005. We also sell scratch cards through newspaper kiosks.

Our exclusive dealers also operate TurkcellExtra shops that are located in popular shopping malls and on main streets. TurkcellExtra shops create a relaxed, user-friendly environment where both existing and potential subscribers have access to new products and services. Each TurkcellExtra shop has at least one Turkcell service consultant trained in services and products.

Also, we have approximately 39,000 sales points for prepaid counters including digital channels as well as ATMs, POSs, kiosks, Call Centers, Internet, Web, WAP, retail chain (NCR tellers), SMS, Digital TV and USSD.

All dealers are paid an activation fee based on the number of new subscribers they sign up, and additional incentives based on their performance are offered.

Channel Management develop strong relationships with and promote brand loyalty among dealers through a variety of support and incentive programs such as those that educate dealers about the technical aspects of our products and services and provide sales training to increase sales and enhance customer relations.

We address large enterprises through direct account managers and small and medium enterprises (SMEs) with indirect sales channels through a corporate focused dealer organization. The main focus is to provide large enterprises and SMEs with mobile services to meet their communication requirements and support these solutions with retention and acquisition programs and tariffs. We work closely with solution partners and application providers to integrate mobility into enterprises’ operations through tailor-made total solutions packages.

Advertising

Our advertising efforts focus on promoting the quality, reliability and novelty of our services. In the early stages of our operations, these efforts concentrated on raising awareness of the benefits of mobile communications, with specific emphasis given to voice transmission. More recently, after the introduction of more sophisticated products and services such as GPRS, EDGE and value added services, our advertising focus has shifted toward promoting the Turkcell brand as Turkey’s premier mobile communications provider. Our innovative new products and services are promoted as providing greater freedom, more convenience and facilitating a better quality of life. Our advertising efforts are segmented along key subscriber segments, with specific campaigns targeting specific subscriber needs. In order to ensure that each message reaches its targeted audience effectively, we advertise through television, cinema, radio, outdoor, print and electronic media as well as direct marketing and field activities like the Turkcell “Road Show” and “Field Force” programs.

Subscriber Services

A key part of our strategy is to provide premium subscriber services by working, thinking and acting in a customer focused manner. Our goal is to develop and sustain a continuous relationship with the customer through tailored subscriber service and excellent value. Our customer’s needs and expectations are obtained through our customer contact points and reflected in our marketing strategies.

In order to achieve this, we mainly work with 2 companies, namely Global and Hobim. Global offers 24/7 contact center services at 6 sites. We align Global’s strategies with Turkcell’s customer service strategies and make sure that customer services and customer satisfaction programs, which are provided by

35

Global, are executed in line with Turkcell’s strategies. Hobim handles the printing of invoices and archives subscription documents for us. In order to provide segmented customer service, we design and make improvements for all of the customer processes throughout all channels for different customer segments as well as monitor the quality of service provided.

International Operations

A component of our strategy has been to become a regional GSM operator. International expansion and particularly continued strong operations in countries in which we are currently present is important for us. We believe these operations will provide additional value to us in the future and will continue to serve an important role in our goal to be the leading GSM operator in the region.

While continued improvement of our current operations is a key priority, we may further expand and increase our presence in key markets in the region such as the Commonwealth of Independent States (C.I.S.), the Russian Federation, Eastern Europe, the Middle East, and North Africa. In accordance with this intent, we made an investment in Ukraine in 2004. We intend not only to transfer our technological know-how and marketing expertise, but also to maximize economies of scale and group synergy. As global competition increases in the telecommunications industry, companies need to evaluate opportunities for “intelligent expansion” within their geographic region to ensure development of new business lines and create synergies with existing ones.

Our international endeavors will continue in 2006. As we have stated previously, our intention is to work on building a fundamentally sound business in Ukraine while following up on issues regarding possible investment in Iran. We may also continue to selectively evaluate other international opportunities in the region as they may arise.

Ukraine—Life:)

We acquired our interest in our subsidiary Limited Liability Company Astelit (“Astelit”) on April 2, 2004 from the shareholders of CJSC Digital Cellular Communications (“DCC”), which held a nationwide GSM1800 license through its then 99% owned subsidiary, Astelit. We hold our interest in Astelit through our subsidiary, Turktell Uluslararasi Yatirim Holding A.S. (“Turktell Uluslararasi”), which holds our interest in Astelit’s immediate parent, Euroasia Telecommunications Holdings B.V. (“Euroasia”). Euroasia currently holds a 99.99% interest in Astelit.

On April 4, 2006, LLC Astelit announced the merger of DCC with Astelit in order to optimize the internal business processes of both companies. The decision for the merger of DCC with Astelit was approved during the Shareholders’ Meeting which took place on April 3, 2006 in Kiev.

In January 2005, we provided $25.5 million in funding to Euroasia through Turktell Uluslararasi, which was used to fund Astelit. This loan was converted to equity on June 2, 2005, and subsequently our effective interest in Euroasia increased to 54.2% through the purchase of certain of the holdings of other shareholders in Astelit. In October 2005, we further provided $30.6 million in funding to Euroasia through Turktell Uluslararasi by means of a back-to-back loan from HSBC Plc. This loan was converted to equity in January 2006, which increased our effective interest in Euroasia to 54.4%.

Our indirectly owned subsidiary Astelit began its operations in the Ukrainian market at the end of January 2005, with its new brand “life:)”. As of the end of 2005, Astelit reached 2.46 million GSM subscribers, of which the major part consists of prepaid subscribers. The life:) brand is strongly implemented into the marketplace as an energetic, young and innovative brand.

Astelit launched new philosophy of using value-added services in one convenient access in interactive package of innovative services via brand lifebox. Astelit was the first on market to introduce EDGE technology which provides data transfer speed five times faster than GPRS. Today, Astelit offers the

36

widest EDGE coverage on the market, in all the 25 oblast centers of Ukraine and the city of Sevastopol. In general, Astelit launched more than 120 new services, out of which 42 were totally unique for the Ukraine mobile market. Astelit was the first operator in Ukraine to introduce unique convergent system allowing pre-paid subscribers to shift to contract keeping their numbers and with flexible payment channels for all subscribers. Astelit introduced ring-back tone to the market, Voice SMS, and many other innovative services never present on the market before.

Astelit offers its users the widest roaming possibilities in Ukraine via unique Roaming Replicator project in 188 countries of the world, thanks to 481 roaming partners.

Currently, Astelit is operating in all major cities of Ukraine with population more than 100,000 inhabitants and more than 12,000 settlements, and all principal intercity highways, which corresponds to coverage of approximately 67.8% of the whole population of Ukraine. Astelit will continue to invest more to increase the coverage level. In November, 2005, Astelit acquired a GSM 900 license, the acquisition of the license will permit Astelit to expand the coverage much faster and it is expected that by the end of the year Astelit will cover all Ukraine in terms of geography.

Astelit is building a highly innovative network in which all base stations support EDGE, and this enables Astelit to introduce many innovative services and products, like Mobile TV launched by Astelit in August 2005. Astelit is strongly dedicated to further develop the innovations on the market and applied for the 3G license in November 2005.

In 2004, agreements have been signed with Nokia Corporation (“Nokia”) and Ericsson AB (“Ericsson”) to provide equipment for the first two years of the network roll out. The amounts of the contracts are €125 million and $89 million respectively. These contracts have been financed by Ericsson Credit AB, Nokia Corporation and ABN Amro N.V. and guaranteed by Turkcell for 55% of the amounts financed plus 55% of interest and costs in case of non-payment by Astelit. Subsequently in 2005 Astelit signed additional agreements with Ericsson and Ericsson Credit AB increasing the amount of supply and service agreements to $174 million and increasing the financing agreements to $134 million. Additionally, Astelit entered into a third equipment supplier contract with Sysdate Pty Ltd (“Sysdate”) for $12.4 million, $7.2 million of which was financed through a vendor financing agreement signed with Sysdate and ABN Amro N.V. We have provided a guarantee for $7.2 million plus interest and costs in case of non-payment by Astelit. With these three guarantees in place, we have substantially fulfilled our obligation to provide funding to the Ukrainian operation for a maximum of $150 million. In return for these guarantees, we pledged minority shares of Euroasia.

By the end of January 2006, all obligations related to Ericsson Credit AB term facility agreement, Nokia Corporation and ABN Amro NV credit facility agreements were fulfilled by repayment of principal amounts of loans together with outstanding amounts of interest.

Astelit signed a 6 year $390 million long term senior syndicated facility on December 30, 2005, the mandated lead managers were ING Bank and Standard Bank. Out of the total facility, $270 million is guaranteed by Export Credit Agency (ECA) and $90 million is a commercial tranche with no guarantees.

In 2006, Astelit will continue to offer products and services for all segments of subscribers with special focus to corporate and VIP users. Astelit was the first on the market in December 2005 to launch the VIP product in mobile communications that is “life Platinum”. As of March 6, 2006, two new pre-paid packages and two new tariffs have been launched and as of March 20, 2006, Astelit has three packages and three tariffs for individual users that meet individual requirements and expectations of the subscribers. Corporate users can choose out of five convenient tariff plans.

Since the acquisition of Astelit in the second quarter of 2004, operations in Ukraine have been consolidated in Turkcell’s financial statements.

37

Fintur

We hold a 41.45% stake in Fintur, which currently holds our entire interest in our international GSM investments other than our Northern Cyprus and Ukraine operations.

During 2004, Fintur executed a capital reduction, which resulted in a decrease in issued capital from EUR 540.0 million to EUR 205.2 million. The effect of such reduction was booked to accumulated deficit, which nearly eliminated the accumulated deficit in Fintur’s standalone Dutch GAAP financial statements as of December 31, 2004. As of December 31, 2005, Fintur is technically able to distribute dividends from its 2005 profit.

Below is a description of the businesses currently held by Fintur.

Azercell

Fintur indirectly owns 51.3% of Azercell Telekom B.M., or Azercell, which offers GSM services on both a prepaid and a postpaid basis in Azerbaijan. As of December 31, 2005, Azercell had approximately 1,741,374 subscribers of which 84,989 were postpaid and 1,656,385 were prepaid subscribers.

Geocell

Fintur indirectly owns 83.2% of Geocell Ltd., or Geocell, which operates a GSM network and offers mobile telephony services in Georgia. As of December 31, 2005, Geocell had approximately 714,831 subscribers, of which approximately 12,741 were postpaid, approximately 53,188 were paid-in-advance subscribers that had postpaid services but pay in advance and approximately 648,902 were prepaid.

GSM Kazakhstan

Fintur owns 51% of GSM Kazakhstan, along with Kazakhtelekom, the Kazakhstan monopoly fixed-line operator, which owns 49%. GSM Kazakhstan offers mobile telephony services in Kazakhstan and had approximately 3,319,243 subscribers as of December 31, 2005, of which approximately 36,245 were postpaid, approximately 857,458 were paid-in-advance subscribers and approximately 2,425,540 were prepaid.

Moldcell

At December 31, 2005, Fintur directly and indirectly owned 100% of Moldcell S.A., or Moldcell, which offers GSM services in Moldova. As of December 31, 2005, Moldcell had 369,622 subscribers of which approximately 17,167 were postpaid, approximately 42,782 were paid-in-advance subscribers and approximately 309,673 were prepaid.

Other

Kibris Telekom

Kibris Mobile Telekomunikasyon Limited Sirketi, or Kuzey Kibris Turkcell (Kibris Telekom), a 100% owned subsidiary of Turkcell, was established in 1999. As of December 31, 2005, Kibris Telekom had 194,109 subscribers. The agreement between Kibris Telekom and the government of Northern Cyprus requires an equal sharing of revenues between the parties. The agreement also provides that if the collected revenues are less than 95% of accrued revenues, the government’s share is calculated on the amount of collected revenues rather than accrued revenues. The agreement terminates automatically at the end of ten years and six months from March 25, 1999.

38

Other Domestic Operations

We continuously monitor new business opportunities which we believe have positive return potential and/or are critical for sustaining our competitive advantage in our core business.

Global

On October 1, 1999, we established Global in order to provide telemarketing, telesales, directory assistance and call center services especially for us. In 2005, Global has completed its transition from call center to contact center where Global started to manage customer contacts at every channel except face-to-face interaction. As of December 31, 2005, Global employed 2,969 employees of which around 80% provide us with customer care and retention services while the remaining workforce serves customers of other clients. We own 99.89% of Global as of December 31, 2005.

Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S.

Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S. (“Inteltek”), established on April 6, 2001, was incorporated to explore business opportunities in the gaming business. Genclik ve Spor Genel Mudurlugu granted Inteltek the right to establish and operate a central betting system, and authorized it as the head agent to establish an agent network to provide para-mutuel and fixed odds betting games on sporting events based on the agreements signed in July 2002 and October 2003. The company has become fully operational during 2004.

Originally, Turktell had a 55% interest in Inteltek, the Greek gaming company, Intralot had a 25% interest and Teknoloji Holding held the remaining 20% interest. On November 17, 2005, Intralot has signed a share purchase agreement with Teknoloji Holding to acquire its 20% interest. As a result, Intralot’s share in Inteltek increased to 45%.

Libero Interaktif Hizmetler A.S.

Libero Interaktif Hizmetler A.S. (“Libero”) was established on September 2, 2003, to provide remote betting services to the general public over the age of 18 through fixed internet, mobile phones, interactive TV and IVR. Turktell has a 55% interest in Inteltek, Intralot has a 25% interest and Teknoloji Holding holds the remaining 20% interest. On March 26, 2004, Libero signed an agreement with Genclik ve Spor Genel Mudurlugu to offer football related remote betting services and started its operations in August 2004. On October 13, 2005, Libero also signed an agreement with the Turkish Jockey Club (“TJK”) to offer horse-race related remote betting services. These services will begin when the work on the technical infrastructure by the TJK is completed.

Bilisim Telekomunikasyon Hizmetleri A.S. (Tellcom)

Bilisim Telekomunikasyon Hizmetleri A.S. (“Bilisim Telekom”) A.S. was established on June 9, 2004, to provide alternative telecommunication services other than GSM. After its incorporation, Bilisim Telekom has obtained a Long Distance Telephony Services (“LDTS”) right which allows the company to provide long distance call origination and termination for consumers and corporates as well as wholesale voice carrying services. Currently, the company carries some of Turkcell’s international traffic, previously carried by Turk Telekom. Bilisim Telekom has also been awarded an ISP license. In February 2006, Bilisim Telekom has changed its name as Tellcom Iletisim Hizmetleri A.S. In March 2006, Bilisim Telekom was awarded a 25-year license which allows the company to roll-out and operate a transmission infrastructure in the Marmara, Aegean and Central Anatolian regions. We own 100% of the company.

39

Potential investments

A-Tel

A-Tel Pazarlama ve Servis Hizmetleri A.S. (“A-Tel”) is a 50-50 joint venture of Yapi ve Kredi Bankasi A.S. (“Yapi Kredi”) and the SDIF. Through an agreement with Yapi Kredi, Cukurova Holding A.S. was granted the right to buy or sell 50% of the A-Tel shares owned by Yapi Kredi in return for consideration amounting to US$150 million. Cukurova Holdings, in turn, offered this option to us. We have conducted a tax, legal and financial due diligence review, and after our Board’s review of the due diligence report, on March 22, 2006, our board of directors decided to exercise the purchase option related to the 50% shares of A-Tel for a consideration of US$150 million. The sale will be completed in 2006.

Iran

In 2004, Turkcell was a participant in the consortium that was awarded the first private GSM operator tender in Iran. Although the consortium signed a license agreement with the Iranian Ministry of Communication and Information Technology in September 2004, the Iranian Parliament subsequently revised the license agreement in 2005. Our Board of Directors decided to continue with the project despite the modifications to the license agreement, but there has been no notification made by the Iranian Authorities regarding any resolution to the first private GSM operator tender in Iran. As a result, we have requested an injunction order in Iranian courts seeking to compel the Ministry to implement the laws and the regulations passed by the Iranian Parliament in connection with the GSM tender. Such injunction order was rejected in April 2006.

We still believe in the Iranian market and we are working to establish conditions necessary for us to be able to make investments in Iran. We currently have no operations in Iran.

Egypt

Our board of directors took a decision regarding its intention to conduct the required studies for the pre-qualification stage and submit a prequalification application in accordance with the relevant provisions of the Request For Proposals (“RFP”) dated February 19, 2006, for the tender of the third GSM license in Arab Republic of Egypt.

In this respect, we signed a Memorandum of Understanding (“MOU”) with Amwal El Khaleej and Banque Misr in order to form a consortium to apply for the pre-qualification of the third GSM license in Arab Republic of Egypt. Under the MOU we will have a 60% stake in the consortium where the remaining stake will be equally divided between other consortium members. We are still evaluating the third GSM license in Arab Republic of Egypt and conducting studies for the pre-qualification application.

Regulation of the Turkish Telecommunications Industry

Overview

All telecommunications activity in Turkey is regulated by the Ministry of Transportation and the Telecommunications Authority. The Telegram and Telephone Law No. 406 (“the Telecommunications Law”), as amended, is the principal law governing telecommunications activity in Turkey. The Wireless Law No. 2813, as amended, and Ministry of Transportation Law No. 3348, as amended, also includes provisions relating to telecommunications in Turkey.

The Telecommunications Law was reformed in 2000 and 2001. The reforms were aimed at modernizing and reforming the legal and institutional framework for the provision of telecommunications infrastructure and service in Turkey.

40

The principal changes introduced in 2000 were:

·       The privatization of Turk Telekom, resulting in government influence reduced to the capacity of shareholder and policy maker;

·       The establishment of an independent regulator, the Telecommunications Authority, with separate legal status and administrative and financial autonomy; and

·       The establishment of a transparent telecommunications framework.

Privatization of Turk Telekom

These changes radically altered Turk Telekom’s legal relationship with the government with the result that the government’s influence over Turk Telekom’s operations and investments has been effectively removed.

Until December 31, 2003, Turk Telekom held a monopoly over the provision and infrastructure of national and international voice telephone services (excluding the telecommunications infrastructure established by business enterprises through concession agreements, telecommunications licenses, general permits or personal telecommunications premises). However, from January 1, 2004, other companies can provide telecommunications services and operate infrastructure upon approval by the Telecommunications Authority. Despite the expiration of Turk Telekom’s monopoly, Turk Telekom, until recently, retained a de facto monopoly as no licenses were granted by the Telecommunications Authority and no operators were authorized to provide services within Turk Telekom’s monopoly area (other than the authorization of long distance call services). However, in March 2006, the Authority granted three companies, one of which is Tellcom, “Infrastructure in Operating Service Licenses”.

On June 5, 2004, the Telecommunications Authority designated Turk Telekom an operator holding a de facto monopoly over national and international voice carrying services in the telecommunication network market, (excluding networks which shall be constructed by licensed Telecommunications operators and individual telecommunications networks) in accordance with The Telegram and Telephone Law No. 406 article 29(b) until the constitution of the fair competition in relevant markets. Consequently, in accordance with The Telegram and Telephone Law No. 406 article 29(b) the Telecommunications Authority has calculated the maximum prices, including rental charges of leased lines and transmissions, that Turk Telekom can charge.

On April 13, 2004, the Telecommunications Authority amended the Regulation on the authorization of Long Distance Call Services. By March 31, 2006, the resulting amendment has allowed 44 new operators to obtain licenses to provide long distance call services. According to the terms of the regulation and license application procedure, Turk Telekom must provide carrier selection and access to the new networks. Turk Telekom has signed Interconnection agreements, which became operational in 2005, with some of those long distance call services operators.

The Telecommunications Authority

The Telecommunications Authority has the authority to grant licenses and set fees in the telecommunications sector. However, the Council of Ministers, upon petition by the Ministry of Transportation, can veto any plans for the authorization of telecommunications services that are subject to concession agreements or infrastructure for the same type of services by third parties. Such agreements include value added telecommunications services, which are carried out by a limited number of operators. These value added services include the allocation of scarce resources such as frequency, orbit position and numbering services necessitating particular rights and obligations specific to each operator. Other value added telecommunications services may be carried out by private sector companies through obtaining a telecommunications license or general permission from the Telecommunications Authority without

41

executing any concession agreement. Under the current legal regime, mobile telecommunications services are provided on the basis of concession agreements granting a license for the construction and operation of a GSM system. The Telecommunications Authority is authorized to enact regulations to set out the necessary qualifications required from operators, including terms and detailed conditions relating to the issuance of licenses, or general permissions and the conditions for execution of concession agreements.

The Telecommunications Authority is an independent telecommunications regulator with financial and administrative independence. Its duties and activities are regulated by the Regulation on Structure, Duties and Working Procedures and Principles of the Telecommunications Authority, as amended, (the “Regulation”), February 17, 2001. Pursuant to the Regulation, the Telecommunications Authority’s executive board is composed of five persons, each with five year tenure, they are appointed by the Council of Ministers from among nominees provided by the Ministry of Transportation, the telecommunications industry, the Ministry of Industry and Trade, and the Association of Exchanges and Business Chambers. The responsibilities of the Telecommunications Authority include, among others:

·       to prepare and submit to the Ministry of Transportation telecommunication plans under the framework Telecommunications Law

·       to monitor the activities of operators, public entities, establishments and private persons in the field of telecommunications;

·       to impose fines and terminate license agreements, concessions or permissions in case of failure to follow regulation or gross negligence;

·       to determine criteria relating to tariffs and other contractual conditions applicable to users of telecommunications services and the interconnection charges between telecommunications networks;

·       to review, evaluate and approve tariffs and inspect their implementation;

·       to scrutinize activities in contradiction of fair competition and provide the Competition Board opinions regarding activities of telecommunication companies that could be competing unfairly; and

·       to take measures to prevent unauthorized transmissions and interferences and to take precautions to protect consumer rights.

The 2002 amendments to the Regulation modified the principles and procedures of the Telecommunications Authority. The Telecommunications Authority can now solicit opinions of market participants through its website when it drafts legislation. It can require operators and other parties to submit their comments and opinions on draft legislation within a specified time.

The Telecommunications Law establishes legal principles and broad policy lines that the Telecommunications Authority must follow. They include:

·       ensuring equal treatment of consumers by telecommunications service providers and equal accessibility of services;

·       promoting affordable access for all to telecommunications services;

·       ensuring compliance with service quality standards; and

·       ensuring all tariffs are fair and that they reflect the costs of investments, operations and reasonable operator profit.

The Telecommunications Law also specifies general rules and principles relating to interconnection between operators. Turk Telekom and other operators are required to satisfy requests of other operators concerning interconnections between their networks. Interconnection, including the tariffs for

42

interconnection, is required to be provided on an equal, transparent and non-discriminatory basis with conditions agreed upon between the parties and on the basis of cost and reasonable profit. Agreements for interconnection are publicly available, but precautions are taken by the Telecommunications Authority to protect commercial secrets of the parties.

Legislation Amending The Wireless Law No. 2813 was published July 13, 2005. The legislation establishes a central database (“CEIR”) containing information on serial numbers (“IMEI”) in order to determine approved handsets, called the White List. There is also a CEIR Black List, which contains handsets that should be reject service on a GSM network because the handsets have been reported as lost, stolen or otherwise unsuitable for use.

Universal Services and Amending Some Laws, Law No. 5369, determines the procedures and principles governing the provision and execution of  universal service and to determine procedures and the rules relating to fulfillment of universal services in the electronic communication sector, a universal public service that is financially difficult for operators to provide (and performance of universal service obligation in electronic communication sector).

The legislation designates the following as Universal Services:

·       fixed-line telephony services;

·       public pay telephones;

·       directory enquiry services and directories;

·       emergency calls services;

·       Internet Services; and

·       Communication Services provided by the Coast Secure and Ship Rescue Services General Directorate

This law mandates that all authorized operators must provide Universal Services and the General Directorate of Communication can demand that operators provide Universal Services on a national and/or geographical area basis.

The legislation does not impose any new financial obligations for GSM operators. However, under the legislation a fund to finance the net cost of Universal Services will be established and the Ministry of Transportation and Ministry of Finance will determine how fund contributions will be shared between the operators.

Turkcell may be designated as an operator obliged to provide Universal Services and therefore Turkcell may benefit from the fund.

The Telecommunications Authority issued a Service Quality Directive on November 10, 2005. The Directive has set out procedures and principles to control the conformity of the services of operators.

According to the directive, mobile telephone operators are obligated to meet service quality requirements and submit a report based on these requirements every three months to the Telecommunications Authority.

On March 8, 2002, the Telecommunications Authority published a Regulation on Principles and Procedures of National Roaming Agreements. Mobile telecommunications and data operators or operators of other services and infrastructure are entitled to enter into national roaming agreements, general authorizations, telecommunications licenses and the regulations issued by the Telecommunications Authority. However, such operators are obliged to satisfy reasonable, economically proportionate and technically possible national roaming requests of other operators. Should an operator fail to fulfill its

43

national roaming obligations or should it unjustifably interrupt such service the Telecommunications Authority can impose a fine of between 1% and 3% of the operator’s turnover for the preceding year.

The Regulation establishes the following principles governing national roaming agreements:

·       The promotion of practices enabling access to telecommunications services at affordable prices;

·       non-discrimination among subscribers, users and operators;

·       the establishment and maintenance of competition between telecommunication providers and operators of infrastructure;

·       the compatibility of telecommunications systems in accordance with international norms, and maintenance of the integrity of the public telecommunications network; and

·       the establishment of a transparent, clear and non-discriminatory balance among the legitimate interests of the parties;

The Telecommunications Law provides basic guidelines as to price and thus leaves the detailed rules and enforcement to the Telecommunications Authority. Operators are entitled to determine tariffs in accordance with the regulations of the Telecommunications Authority. The Telecommunications Authority is authorized to determine the caps of tariffs, including line rentals. In making that determination, the Telecommunications Authority will take into account the terms and conditions of the concession agreements, licenses and general permissions in compliance with the guidelines set out in the Telecommunications Law. These guidelines require, among other things, that tariffs should be fair and should not involve any undue discrimination without justified reasons against persons under the same circumstances. They also require that international agreements to which Turkey is a party and the recommendations of international institutions should be taken into consideration in the determination of tariffs.

The Telecommunications Authority passed the “Tariff Regulation” on August 28, 2001, which sets out the principles and procedures to be applied for the approval and the audit of the tariff to be applied to the telecommunications services if it is determined that a business enterprise: (i) is a legal or a de facto monopoly; or (ii) is in a dominant position in the relevant service or geographic market; or (iii) has significant market power. In case it is determined by the Telecommunications Authority that the business activities are within the scope of such Regulation, the tariffs should be submitted to the Telecommunications Authority for approval. In determining which operators possess dominant position, the Telecommunications Authority will take into consideration the following criteria: market share; vertical integrity; the power to influence market conditions; entrance to relevant market; difficulty to control and replace the network; technologic superiority; lack of competition in the relevant market; the quantity of unused capacity and the power to access financial resources. On June 9, 2004, the Telecommunications Authority designated Turkcell an “operator holding dominant position” in the GSM Mobile Telecommunications Services Market.

The Telecommunications Authority published a Regulation on processing personal information and protecting confidentiality in the telecommunications industry on February 6, 2004. This Regulation establishes general principles to secure personal information and protect confidentiality. The Regulation established the following principles: an operator’s technical or administrative precautions to secure its services and its network must be approved by the Telecommunications Authority; operators must warn their consumers about risks and give them information to prevent such risks; except pursuant to a legal obligation or court decision, an operator may not listen to, observe, record, preserve, or disconnect voice telecommunications without the permission of those communicating; and operators may not observe, record or preserve data traffic concerning telecommunications except for their services.

44

The Telecommunications Authority published a regulation concerning “Co-Location and Facility Sharing” on December 31, 2003. According to the Regulation, operators holding significant market power and Turk Telekom will be Co-Location incumbents and operators having the right to establish their facilities upon or under of public or third party’s land or having the rights to compulsory such lands, will be of Facility Sharing incumbents.

General Principles of Application of The Regulation concerning “Co-Location and Facility Sharing”: Co-Layout and Facility Sharing prices will be determined on cost basis. Any land, facility and the facilities under the usage of Co-Location responsible is in the scope of Co-Location and Facility Sharing to increase competition, to use restricted sources efficiently and to support public good. The costs should be certificated by the Co-Location responsible. Efficient competition should be incited between the operators. To not corrupt parties operational and investment plans, an efficient communication between parties shall be provided.

On September 5, 2004, the Telecommunications Authority abolished the Regulation on Administrative Fines to be imposed on the Operators (published on August 1, 2002) and published the Regulation on Administrative Fines, Sanctions and Precautions to be imposed on the Operators. According to the amended Regulation the Telecommunications Authority retains the right to impose fines in the event an operator submits incorrect or misleading documents; fails to submit documents as requested by the Telecommunications Authority; does not timely submit such documents; does not permit inspection or audit to be made by the Telecommunications Authority; uses unpermitted equipment or equipment not complying with standards; alters technical features of equipment; or does not pay fees arising from its use of license and frequencies or does not comply with the provisions of concession agreements, telecommunications licenses and general authorizations or the legislation. In addition, the amended Regulation authorizes the Telecommunications Authority to impose sanctions and precautions as well as administrative fines.

Turkish Competition Law and the Competition Authority

In March 1997, the Competition Law (Law No. 4054) established a Competition Board. The Competition Board, consists of 7 members who are appointed for a term of six years. It is an autonomous authority with administrative and financial independence established to ensure effective competition in markets for goods and services.

Powers and Functions of the Competition Board

The Competition Board can carry out investigations, evaluate requests for exemptions, monitor the market, assess mergers and acquisitions, submit views to the Ministry of Industry and Trade and perform other tasks stipulated by the Competition Law. The Telecommunications Authority can apply to the Competition Board if it determines that agreements regarding standard reference tariffs, network interconnection and roaming violate the Competition Law.

Furthermore, any real or legal entity may file a complaint with the Competition Board. Upon determination of any violation, the Competition Board can take necessary measures to prevent the violation and may impose fines on those who are liable for such prohibited practices.

In September 2002, the Telecommunications Authority and the Competition Board entered into a Protocol on Cooperation. The Protocol establishes a framework whereby the Telecommunications Authority and Competition Board can cooperate on legal actions and attitudes regarding measures, detections, regulations and inspections that affect competition conditions and the extension of competition in the telecommunications sector. The Protocol on Cooperation allows issues to be resolved more effectively and maintains a free and sound competition environment in the telecommunications sector. Furthermore, it prevents controversial and/or misleading statements by handling the complaints of the

45

operators, and it harmonizes the interpretation of related legislation thus enabling mutual cooperation and information transfer.

GSM Licensing in Turkey

We have signed a renewed concession agreement for our GSM license on February 13, 2002. The major provisions of the renewed agreement are identical to those in the concession agreement we had signed with the Ministry of Transportation in 1998. However, the renewed agreement provides that a monthly payment of 15% over our gross revenue paid to the Treasury shall be subject to the legal interest rate. Also, if such payments are not duly paid twice in any given year, a penalty in an amount equal to triple the last monthly payment shall be payable to the Treasury. We are also obliged to pay annual contributions to the Telecommunications Authority’s expenses in an amount equal to 0.35% of our net revenues. Finally, an article concerning the protection of users’ (“subscribers”) rights and an article concerning arbitration for the settlement of disputes are included in the renewed concession agreement.

The Law numbered 5398, dated July 3, 2005, changed the definition of gross revenue. Article 16 of the Law No. 5398 provides that The Concession agreements shall be adapted to the mentioned change upon the request of the operators. Accordingly Turkcell applied to the Telecommunications Authority on June 25, 2005. On  March 10, 2006 the adapted concession agreement was signed between Turkcell and the Telecommunications Authority.

Under the Telecommunications Law, a license for value added telecommunications services may be granted for up to 49 years. A GSM licensee is subject to the Telecommunications Authority’s right to suspend or terminate operations of the licensee on the grounds of security, public benefit, national defense or to comply with international treaties. However, suspension or takeover of facilities under these circumstances is subject to the payment of compensation to the operator. The Telecommunications Authority can also inspect such licensee and nullify its license if the licensee has materially failed to comply with the terms of its license.

The terms of license agreements are governed by the Authorization Regulation, and it provides that the Telecommunications Authority can supervise licensed operators of valued added services, approve the transfer of licenses to third parties, ensure continuation of services in the event of cancellation of a license and approve the investment plans submitted by licensees.

The Telecommunications Authority can require an operator to modify its tariffs to promote fair competition or the public interest, and the Telecommunications Authority may also terminate licenses in cases of gross negligence.

Under the Authorization Regulation, the licensee is responsible for installing telecommunications equipment in conformance with international signalization systems and numbering plans. Further, the licensee is obligated to make those investments which are necessary to offer the licensed service. These obligations include design of the service, the making of financial investments and the installation and operation of the facility required for the service. Licensees are allowed to determine the prices for services, subject to the regulations of the Telecommunications Authority. Copies of the tariffs are required to be made available to the public and to customers. Upon the expiry of a license, including termination, the facilities and immovables of the licensee relating to the value added services will be transferred by the licensee in accordance with the license agreement.

Under the Authorization Regulation there are four types of authorization to provide telecommunications services and establish and operate infrastructure. All with a maximum term of 25 years except general authorization :  i) Duty Agreement (only between Turk Telekom and the Authority; after the privatization of Turk Telekom, a concession agreement was signed between Telecommunication Authority and Turk Telekom; ii) Concession Agreement; iii) Telecommunications License; and iv) General Authorization.

46

Operators sign a Concession Agreement with the Telecommunications Authority to provide telecommunications services or/and to establish or operate networks carried out by a limited number of operators on a national basis. On the other hand, operators providing telecommunications services or/and to establish or operate networks that are provided by a limited number of operators on a regional or local basis could be provided by acquiring a first type Telecommunications License by Telecommunications Authority. Operators who are authorized via a Concession Agreement or first type Telecommunications License cannot be authorized by any other authorization type. Turkcell has signed a Concession Agreement and thus cannot be authorized by any other authorization type.

Second Type Telecommunications Licenses can be granted for the services listed in Article 18 of Law No. 406 if they are not required to be provided by a limited number of operators. Operators should obtain a Second Type Telecommunications License from the Telecommunications Authority to provide telecommunications services or/and to establish or operate network that are not required to be carried out by a limited number of operators and services listed on article 18 of the Telecommunication Law. General Authorizations are issued for the telecommunications services and infrastructure which are not listed in Article 18 of Law No. 406 and if they are not required to be provided by a limited number of operators.

The Licenses, which may be granted under the Regulation, shall have a maximum term of 25 years.

Under the Authorization Regulation, companies applying for a first type telecommunication license, to conclude a license agreement or a second type telecommunication license or a general permit should meet the following criteria:

·       The company must be a joint stock company and shares must be registered.

·       The company should be established in accordance with the laws of Turkey.

·       The scope of the company as outlined in its articles of association should include telecommunications and the telecommunications activity which is applied for.

·       Those who form the company and the shareholders holding at least 5% of the shares of the company should not have been convicted to imprisonment due to;

·       crimes committed against the government or the crimes set out in the Struggle with Terrorism Act,

·       crimes against the Banking Law, Capital Market Law, debit, malversation, bribe, robbery, forgery, collusion, fraudulent bankruptcy, betrayal of trust, smuggling, tax fraud, corruption in a official tender or purchase and sale process, money laundering.

·       And finally, the company should fulfill any other terms of tender.

Additionally for a first type telecommunication license and for a second type telecommunication license, the company should fulfill any other specific provisions of the annex relating to relevant type of services.

During the term of the relevant License or Permit, the License or Permit holder is obliged to do the following:

·       Submit an investment plan for the coming year to the Telecommunications Authority, and notify the Telecommunications Authority of any revisions thereof.

·       Obtain the approval of the Telecommunications Authority for uniform subscription agreements prepared for each service.

·       Keep separate accounts for each License or Permit held.

47

·       Conduct the activities permitted under the License or the Permit within a separate entity if such License or Permit holder company is determined by the Competition Board to be in a dominant position in another sector.

·       Provide the Telecommunications Authority with internally audited final income statements and balance sheets within two months following the end of each financial year.

·       Submit to the Telecommunications Authority any financial audit reports and financial statements and other documentation as may be requested within one month following the end of the financial audit.

·       Provide the Telecommunications Authority with all documents related to agreements with third parties and information on equipment stocks as may be requested.

·       Connect or allow for the connection of any terminal equipment to its own system, provided the connection to the telecommunication network is approved by the Telecommunications Authority.

The License or Permit holder may assign its rights and obligations under the License or the Permit with the written consent of the Telecommunications Authority.

The Telecommunications Authority is authorized to amend or cancel the provisions and conditions of the License or the Permit.

The License Agreement

General

From 1993 until April 27, 1998, we were subject to a revenue sharing agreement with Turk Telekom. Under our revenue sharing agreement with Turk Telekom (successor of PTT), Turk Telekom allocated frequency bands necessary for the operation of a GSM network, executed subscriber contracts, performed subscriber billing and fee collection and allowed us access to Turk Telekom’s existing communications networks. In addition, Turk Telekom allowed us to construct base station control stations at Turk Telekom’s facilities and leased transmission connections between base stations, mobile telephone exchanges and control stations to us.

In exchange, we provided mobile telephone services within Turkey through a multi phase build-out of a GSM system. The first phase of the build-out covered Istanbul, Ankara and other large population centers along with airports and the airport roads. The second and third phases provided for the build-out of the GSM network to less densely populated areas. In addition, through our contractual relationships with Ericsson Turkey and Sonera, we provided the necessary equipment and expertise for the operation of the GSM network. We received 100% of the fees generated by SIM card sales, 32.9% of the fees billed for connection, monthly fixed fees and outgoing calls and 10% of the fees billed for incoming calls, an arrangement that resulted in payment to us of approximately 25% to 30% of the net system revenue generated by subscribers of our GSM network. We currently operate under a 25-year GSM license which we were granted in April 1998 upon payment of an upfront license fee of $500 million. Initially, we signed the license agreement with the Ministry of Transportation and as per the requirements under the Amending Law, we have renewed the agreement to which the Telecommunications Authority is the party. The new agreement has introduced two extra articles. The first one involves an administrative fee, amounting to 0.35% of the previous year’s gross revenue less tax, treasury share, and VAT, payable to the Telecommunications Authority until the last working day of April in the following year. The other article underlines consumer rights of subscribers during their subscription to the network.

Law 5398 of July 3, 2005 changed the definition of gross revenue. Article 16 of the Law No. 5398 provides that The Concession agreements shall be adapted to the mentioned change upon the request of the operators. Accordingly Turkcell applied to the Telecommunications Authority on June 25, 2005. On

48

March 10, 2006 the adapted concession agreement was signed between Turkcell and the Telecommunications Authority. With this adaptation the definition of gross revenue determined in the concession agreement changed.

Terms

Under the license agreement, we hold a licensed concession to provide telecommunications services in accordance with GSM-PAN European Mobile Telephone System standards in the 900 MHz frequency band. Our license covers 50 channels in the 892.2-959 MHz band and allocates telephone numbers between the 530 and 539 area codes in the national numbering plan. Our license also permits us to establish customer service centers, sign contracts with subscribers and market our services to subscribers. Our license was issued with an effective date of April 27, 1998, for an initial term of 25 years. At the end of the initial term, we must renew our license subject to the approval of the Telecommunications Authority, but under current Turkish law, our term cannot exceed 49 years. We shall apply to the Telecommunications Authority between 24 months and 6 months before the end of our license. Our license is not exclusive and is not transferable without approval of the Telecommunications Authority.

We paid a license fee of $500 million to the Turkish Treasury upon effectiveness of our license. As security for the performance of our obligations, we were also required to deliver cash or a bank guarantee equal to 1% of our license fee. On an ongoing basis, we must pay 15% of our monthly gross revenue, which has been redefined as of March 10, 2006 to include subscription fees, monthly fixed fees and communication fees and  to exclude interest charges for late collections from subsribers and indirect taxes, such as 18% VAT and other expenses as well as the accrued amounts that are recorded for reporting purposes to the Turkish Treasury. We have settled with the Ministry of Transportation concerning the calculation of ongoing license fee payments. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

In addition, our license agreement requires that we obtain permission from the Telecommunications Authority for a transfer of our shares representing 10% or more of our share capital within five years starting from the date of our license, which is April 27, 1998. Furthermore, under the Telecommunication Services Regulation, the Telecommunications Authority must approve any transfer of 49% or more of our shares by any of our original shareholders. This restriction does not apply where the transferee, on the date of the license’s issuance, was either a subsidiary, an affiliate or a group company.

License Conditions

Our license subjects us to a number of conditions. While the license agreement provides that our license may be revoked in the event that we fail to meet any of these conditions, we believe that we are currently in compliance with all license conditions.

Coverage

Our license requires that we meet coverage and technical criteria. We must attain geographical coverage of 50% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within three years of our license’s effective date and at least 90% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within five years of the effective date of our license. This coverage requirement excludes coverage met through national roaming and installation sharing arrangements with other GSM systems and operators. Upon the request of the Telecommunications Authority, we may also be required, throughout the term of our license, to cover at most two additional areas each year. Except in the event of force majeure, we must pay a late performance penalty of 0.2% of the investment in the related coverage area per day for any delay of more than six months in fulfilling a coverage area obligation. As of today, we have met and surpassed all coverage obligations.

49

Service Offerings

Our license requires that we provide services that, in addition to general GSM phone services, include free emergency calls and technical assistance for customers, free call forwarding to police and other public emergency services, receiver optional short messages, video text access, fax capability, calling and connected number identification and restrictions, call forwarding, call waiting, call hold, multi party and three party conference calls, billing information and the barring of a range of outgoing and incoming calls.

Service Quality

Generally, we must meet all the technical standards of the GSM Association as determined and updated by the European Telecommunications Standards Institute and Secretariat of the GSM Association. Service quality requirements require that call blockage not exceed 5% and call drops not exceed 2 dropped calls per erlang, which is the industry standard measuring the ratio of total dropped calls during the most congested hour of network traffic during the relevant time period to the traffic intensity for that congested hour. The Telecommunications Authority has the right to monitor our service standards, compile information and take action to guarantee customer rights. Additionally, as a guarantee of our service and coverage commitments, we must obtain all-risk insurance coverage at an adequate amount to provide for uninterrupted operation.

Tariffs

The license agreement regulates our ability to determine our tariff for GSM services. The license agreement provides that, after consultation with us and consideration of tariffs applied abroad for similar services, the Telecommunications Authority sets the initial maximum tariffs in Turkish Lira and US dollars. Thereafter, our license provides that the maximum tariffs shall be adjusted at least every six months. The license agreement provides a formula for adjusting the existing maximum tariffs based on, in the case of maximum tariffs established in New Turkish Lira, the Turkish Consumer Price Index announced by the Ministry of Industry and Trade of Turkey. The increase applied is 97% of the increase in the index. In the case of maximum tariffs established in US dollars, the increase is based on the US Consumer Price All Item Index minus 3%. Although action is required for an adjustment of maximum tariffs, our license agreement provides that we are free to establish rates for services up to the then existing maximum tariff (subject only to a seven-day prior notification to the Telecommunications Authority).

On July 10, 1998, the Ministry of Transportation, the then-authorized body, established under our license a set of initial maximum rates and a set of initial maximum standard tariffs that govern both Telsim and us. The initial standard tariffs constitute the highest rates that we may charge for particular services to customers that have not purchased any of the customized service packages that we offer. The maximum rates constitute the highest rates we may charge for the services included in these customized service packages. Generally, the maximum rates for particular services are set higher than the standard tariffs for those services. Therefore, in customizing our service packages to meet the needs of different customer segments, we may combine higher activation or monthly charges (or both) with lower airtime rates.

Under the standard tariff, we may from time to time notify the Telecommunications Authority of a per-minute airtime fee, which is treated as its Basic Unit Rate.

The standard tariffs and the maximum rates have been established in New Turkish Lira and the Telecommunications Authority’s schedule of standard tariffs and maximum rates are premised on the TRY/US$ Exchange Rate in effect on the date they were approved by the Telecommunications Authority.

We believe that the existing initial standard tariffs and the existing initial maximum rates have been established at levels that enable us to offer competitive pricing and service packages consistent with our overall marketing strategy and business plan.

50

Relationship with the Telecommunications Authority

The license agreement creates a mechanism for an ongoing relationship between us and the Telecommunications Authority. The Telecommunications Authority and Turkcell coordinate their activities through a License Coordination Committee, or the Committee. The Committee is comprised of five members, two appointed by the Telecommunications Authority, two by us and one by agreement of the Telecommunications Authority and our members, or, if no agreement is reached, by the Chairman of the Telecommunications Board. The Committee is charged with the task of ensuring the proper and coordinated operation of the GSM network, assisting in the resolution of disputes under the license agreement and facilitating the exchange of information between the parties.

The Committee meets at least quarterly and establishes its own operating principles and procedures unless an extraordinary meeting is called by any party with a 7-day advance notice. Matters in dispute are expected to be submitted to the Committee for resolution. While not binding, the Committee may render consultative decisions. Either the Telecommunications Authority or we may convene a special meeting to consider issues that arise under the license agreement.

License Suspension and Termination

The Telecommunications Authority may suspend our operations for a limited or an unlimited period if necessary for the purpose of public security or national defense, including war and general mobilization. During suspension, the Telecommunications Authority may operate our business, but we are entitled to any revenues collected during such suspension, and our license term will be extended by the period of any suspension.

Our license may be terminated under our license agreement:

·       upon a bankruptcy ruling against us by a competent court or a bankruptcy compromise decision, which is an agreement between creditors and a debtor to reschedule the debt of the debtor, if such ruling or compromise is not reversed or dismissed within 90 days after notice;

·       upon our failure to perform our obligations under the license agreement if such failure is not cured within 90 days after notice;

·       if we operate outside the allocated frequency ranges and fail to terminate such operations within 90 days after notice; or

·       if we fail to pay our ongoing license fee.

In the event of termination, we must deliver the entire GSM system to the Telecommunications Authority.

If our license is terminated for our failure to perform our obligations under our license, the performance guarantee given by us in an amount equal to 1% of the license fee may be called. The license agreement makes no provision for the payment of consideration to us for delivery of the system on such termination.

In the event of a termination of our license, our right to use allocated frequencies and to operate the GSM system ceases. Upon the expiration of the license agreement, initially scheduled to occur in 2023, without renewal, we must transfer to the Telecommunications Authority, or an institution designated by the Telecommunications Authority, without consideration, the network management center, the gateway exchanges and the central subscription system, which are the central management units of the GSM network. These units include related technical equipment, immovables and all other installations and assets used in the operation of the system. We may apply to the Telecommunications Authority between 24 and 6 months before the end of the 25-year license term for the renewal of the license. The

51

Telecommunications Authority may renew the license, taking into account the legislation then currently in effect.

Applicable Law and Dispute Resolution

Under our license agreement, any dispute arising from or under our license shall be brought before the License Coordination Committee. If the dispute is not settled within 30 days before the License Coordination Committee, it shall be referred to the parties. If the dispute is not resolved by the parties within 15 days, then it shall be settled by an arbitral tribunal in accordance with International Chamber of Commerce (“ICC”) Rules. The governing law of any arbitration is Turkish law and any such arbitration shall be conducted in English. Disputes relating to national security or public policy shall not be subject to arbitration proceedings.

Access and Interconnection Regulation

The Access and Interconnection Regulation (the “Regulation”) became effective when it was issued by the Telecommunications Authority on May 23, 2003. The Regulation sets forth the rights and obligations of the operators in the telecommunications sector in Turkey and establishes rules and procedures pertaining to their performance of such obligations. The Regulation primarily sets forth applicable principles, details of access and interconnection obligations, financial provisions, and policies and procedures regarding negotiations and contracts for access and interconnection.

The Regulation is driven largely by a goal to improve the competitive environment and ensure that users benefit from telecommunications services and infrastructure at a reasonable cost. Under the Regulation, the Telecommunications Authority may compel a telecommunications operator to accept another operator’s request for use of and access to its network. All telecommunications operators in Turkey may be required to provide access to other operators. The operators who are compelled to provide access to other operators are obliged to provide service and information on the same terms and qualifications provided to their shareholders, subsidiaries and affiliates.

In accordance with the Regulation, the telecommunications providers in Turkey (including Turk Telekom) are obliged to renew their interconnection agreements within two months following the issuance of the Regulation. The renewed agreements must comply with the provisions of the Regulation, including cost-based pricing. Accordingly, we entered into a supplementary protocol with Telsim on October 9, 2003, and with Turk Telekom the following day. On September 9, 2003, we entered into a new interconnection agreement with Globalstar. As a result of intervention by the Telecommunications Authority, we entered into new supplemented protocols with Turk Telekom on November 10, Telsim on November 21, and Globalstar on December 11, with amended tariffs and tariff adoption procedures.

The Telecommunications Authority published a communiqué on June 3, 2003 defining “significant market power” as “the power to influence economic parameters such as the purchase or sale price of services provided to other operators and users; supply and demand of said services; market conditions; components of fundamental telecommunications network utilized for telecommunications services; and access to users in the relevant telecommunications market.”  In determining which operators possess significant market power, the Telecommunications Authority will take into consideration the following criteria: market share; the power to influence market conditions; the relationship between quantity of sales and size of the relevant market; the power to control access to the end user; power to access financial resources; and experience regarding production and introduction of services in the market. On August 21, 2003, the Telecommunications Authority designated us an “operator holding significant market power” in the “GSM Mobile Telecommunication Services Market” and “GSM Mobil Call Termination Services Market” and Telsim an “operator holding significant market power” in “the GSM Mobil Call Termination Services Market.”  On January 4, 2005, the Telecommunications Authority designated Turkcell

52

individually as an “operator holding significant market power” in the “GSM Mobil Call Termination Services Market”. Finally, on December 15, 2005, the Telecommunications Authority designated Turkcell, Telsim and Avea as “operators holding significant market power” in the “GSM Mobil Call Termination Services Market” and designated Turkcell individually as an operator holding significant market power in the “Access to GSM Mobile Networks and Call Originating Markets”.

While all operators will be obliged to enter into negotiations for interconnection agreements with any requesting operator, Turkcell, Telsim and Avea as operators holding significant market power in the “GSM Mobil Call Termination Services Market”, as well as Turk Telekom, are obliged to provide interconnection. These operators may limit access or interconnection to other operators only if it is objectively proven that network operation security or network integrity or data protection cannot be maintained or that interconnection or access is technologically unfeasible; in any case, the approval of the Telecommunications Authority is also required. The Telecommunications Authority may also limit the interconnection obligation of an operator upon the operator’s request, provided that there are technical and commercial alternatives to the interconnection or that required resources for such interconnection are unavailable. While operators not deemed to hold significant market power are free to set their access and interconnection tariffs, operators holding significant market power are required to determine their access and interconnection tariffs on a cost basis. Specifically, the Regulation provides that the tariffs will be the marginal cost of procuring efficient services, including an “appropriate return” on capital employed for procurement of services, plus a portion of overall costs attributable to such service.

In addition, the Telecommunications Authority has required operators holding significant market power, as well as Turk Telekom, to share certain facilities with other operators under certain conditions and to provide co-location on their premises for the equipment of other operators at a reasonable price by the regulation concerning “Co-Location and Facility Sharing.”  See “Regulation of the Turkish Telecommunications Industry” above.

The Telecommunications Authority may also require telecommunications operators to provide number portability, which means allowing users to keep the same phone numbers even after they switch from one network to another.

Under the Regulation, operators holding significant market power are required to provide access and services to all operators on equal terms. Operators with significant market power are also required to perform unbundling of their services, which means that they have to provide separate service of and access to transmission, switching, and operation interfaces. Furthermore, the Telecommunications Authority may establish rules applicable to the division of the costs of facilities among parties.

All access and interconnection contracts must be submitted to the Telecommunications Authority within fifteen days of execution. The Telecommunications Authority may request modifications to the contracts should they contain any provisions contrary to the legislation. The access and interconnection contracts will be publicly available, excluding trade secrets. All operators holding significant market power will also be required to prepare reference interconnection proposals and submit them to the Telecommunications Authority. Turk Telekom will submit such reference interconnection proposals within three months of the date of the Regulation; other operators will be required to submit such proposals within three months following the date of the Telecommunications Authority’s determination that they hold significant market power. Except where otherwise specified by the Telecommunications Authority, reference interconnection proposals will be renewed every year. We have submitted our reference interconnection proposal to the Telecommunications Authority, which has the right to vary its terms. Furthermore, on May 3, 2005 the Telecommunications Authority has published our interconnection proposal on its website.

If two operators are unable to reach an interconnection agreement within three months of the date of the initial access request, either party may refer the dispute to the Telecommunications Authority for

53

resolution. Should the parties continue to be unable to reach an agreement within six weeks (which the Telecommunications Authority may extend for an additional four weeks) after the Telecommunications Authority initiates a settlement procedure, the Telecommunications Authority will establish terms, conditions, and fees applicable to the agreement and binding on both parties.

Should a telecommunications operator violate any provisions of the Regulation, the Telecommunications Authority may impose an administrative fine ranging from 0.5% to 3% of the operator’s turnover for the preceding calendar year.

In September 2004, the Telecommunications Authority published “Standard Reference Interconnection Tariffs, to recommend call termination fees of the operators holding significant market power on “GSM Mobil Call Termination Services Market” and Turk Telekom. In accordance with the recommendation as of January 1, 2005, call termination fees of the operators holding significant market power on “GSM Mobil Call Termination Services Market” is 0.148 TRY and as of October 1, 2005, 0.140 TRY.

The Ukraine License Agreement

Our subsidiary, Astelit, operates under an “Activity License” issued by the State Committee of Communication of Ukraine (Telecommunications Authority until 2005) (the “SCCU”) on June 8, 1998, with an initial term of ten years. This license grants us the right to build, maintain and use (i.e. provide telecom services) a cellular radio telecommunications network compliant to the DCS-1800 standard until June 8, 2008. The Activity License is supplemented by a non-transferable “Frequency License”, issued by the same authority. We pay $75,012 per month for the allocated frequencies under our Frequency License. Another Ukrainian subsidiary of ours, DCC, also maintains several licenses, including a license for local telephone network construction, maintenance and use compliant to the D-AMPS standard, a number of D-AMPS frequency licenses (complimentary to activity licenses), a long-distance (national) and international carrier license and radio link frequency licenses.

In November 2005, Astelit acquired an activity license which grants it the right to build, maintain and use (i.e. provide telecom services) a cellular radio telecommunications network compliant to the GSM 900 standard until November, 2020 at a cost of $1.8 million. In November, 2005 Astelit also acquired two frequency licenses covering all 25 regions of Ukraine, and valid until November, 2020 at a cost of $4.5 million. Astelit pays $10,693 per month for the allocated frequencies under our Frequency Licenses.

The terms of our licenses require us to make certain notifications to Ukrainian government agencies and also to maintain certain levels of service for our customers. If we violate the provisions of our licenses, our license or operations could be suspended or terminated for a limited or unlimited period. In addition to maintaining licenses, Astelit and DCC have each concluded interconnection agreements with other Ukrainian telecommunications companies including Ukrtelecom, UMC, Kyivstar and Goldentelecom. These agreements set forth generally the rates for interconnection services, as well as standards, equipment to be used, settlements procedure, dispute resolution and amendment procedures.

Turk Telekom, Telsim, Avea, Milleni.com and Globalstar Interconnection Agreements

General

We have entered into interconnection agreements with Turk Telekom, Telsim, Avea Milleni.com and Globalstar.

Under these interconnection agreements, Turk Telekom, Telsim, Avea, Milleni.com and Globalstar agree to permit interconnection of their networks with our network to enable calls to be transmitted to, and received from, the GSM system operated by us through its existing digital fixed telephone switches.

54

The interconnection agreements also establish understandings between the parties relating to various key operational areas, including call traffic management and the agreements contemplate that we and the other parties will agree to the contents of various manuals that will set forth in detail additional specifications concerning matters which are not specifically covered in the interconnection agreement. These matters include quality and performance standards, interconnection interfaces and other technical, operational and procedural aspects of interconnection.

The interconnection agreements specify that the parties shall comply with relevant international standards, including standards adopted by the GSM Memorandum of Understanding, the Telecommunications Standards Bureau of the International Telecommunications Union and the European Telecommunications Standards Institute. In the absence of applicable international standards, the interconnection agreements provide that the parties will establish written standards to govern between them.

The interconnection agreements outline the applicable interconnection principles and provide the technical basis and rationale for technical specifications and manuals to be agreed to by the parties. The interconnection agreements:

·       set forth agreements between the parties relating to the location of exchanges;

·       create obligations regarding network alterations;

·       establish routing principles to govern how call traffic will be routed within a network and between the networks of the parties, including interconnection routing rules;

·       provide for arrangements concerning capacity and expansion of capacity through new points of interconnection;

·       mandate arrangements concerning the use of numbering to transmit calls in accordance with national and international practices;

·       provide for periodic technical review meetings between the parties;

·       permit each party to engage in testing of interconnection exchanges;

·       address the consequences of transmission failures;

·       create an obligation to cooperate in order to maximize overall quality of transmission of calls in accordance with international standards;

·       deal with emergency calls, calling line identification and malicious call identification;

·       assure the ability of a party to have access to the other party’s premises where relevant equipment may be located (subject to appropriate protections);

·       establish procedures to deal with network faults; and

·       address issues relating to the construction and installation of antennas, towers and other elements of system infrastructure.

In addition, the parties agree to provide to the other party information which is necessary to enable performance of their interconnection obligations, the provision of services or utilization of equipment and/or buildings as contemplated in the interconnection agreement.

Turk Telekom

In the Turk Telekom interconnection agreement, Turk Telekom also agrees to permit us to utilize Turk Telekom’s buildings, premises and other infrastructure and to lease the means of communications transmission between our GSM exchanges, base stations and base station control stations. We retain the right, however, to establish our own transmission network at our own expense in the event that such

55

transmission network is not made available to us by Turk Telekom, subject to the consent of the Telecommunications Authority.

If Turk Telekom enters into interconnection agreements with other operators of mobile or similar telecommunications services, the conditions of such agreements must be the same as those in their interconnection agreement with us. If any such agreement does contain differing terms, we have the right to demand identical terms. If we desire to use the facilities and such use would impair the use of such facilities by others, our request will be given priority over potential users of the facilities that have not entered into license agreements with the Telecommunications Authority. Priority among operators which have entered into such license agreements will be given to the application that was first received by Turk Telekom.

The Turk Telekom interconnection agreement specifies that ownership of the GSM equipment and other materials, including those in existence on the date of the Turk Telekom interconnection agreement and those subsequently installed, belong to us. The agreement also provides that intellectual property rights will belong to the developer or owner.

Payments

The Turk Telekom interconnection agreement provides for the payment by us to Turk Telekom of fees for the interconnection services provided by Turk Telekom and for the lease of transmitting facilities linking base stations, mobile telephone exchanges and base station control stations. Turk Telekom is not entitled to any payment in respect of our use of our own transmission system. Turk Telekom also agrees to pay us for calls transmitted over our network.

The Turk Telekom interconnection agreement provides that Turk Telekom will pay the 1% Turkish communications tax, which is payable on the basis of communications fees collected by Turk Telekom from customers in connection with telephone, facsimile, telex and data excluding subscription fees. Turk Telekom is liable to pay this tax to the relevant municipality pursuant to the Municipality Revenues Act. We would be liable in respect of any increase in the applicable rate of the communication tax. If a party fails to make payment when due, the amount past due is deemed converted into US dollars and bears interest at a rate of 2% per month.

A number of the provisions of the Turk Telekom interconnection agreement address matters concerning billing and payment of bills for services rendered under the Turk Telekom interconnection agreement. Each party is required to record call information and to provide that information to the other party. Each party is responsible for invoicing the other party on a monthly basis.

Call Tariffs

In accordance with the agreement concluded between Turkcell and Turk Telekom on September 20, 2003, the call tariffs are set in Turkish Lira and will be revised by the parties every three months based on the consumer price index. During periods of sharp devaluation of the Turkish Lira, the devaluation rate will also be taken into consideration in such revisions. These price terms are applicable until the end of 2004 when both parties will revise them based on conditions reached at that time. All the rates are net of all applicable taxes.

The parties couldn’t agree on call termination tariffs which would be applicable from December 12, 2004, Turk Telekom referred this dispute to the Telecommunications Authority for resolution. The Telecommunications Authority applied its provisional call termination tariffs of August 5, 2005 to both parties. In accordance with the decision of Telecommunications Authority; Turk Telekom must pay Turkcell 0.140 TRY  (approximately 10.5 cents as of April 7, 2006) per minute as of October 1, 2005. And Turkcell shall pay to Turk Telekom a net amount of 0.02 TRY (approximately 1.5 cents as of April 7, 2006)

56

per minute for local traffic and a net amount of 0.037 TRY (approximately 2.8 cents as of April 7, 2006) per minute for metropolitan and long-distance traffic routed from Turkcell to Turk Telekom.

For SMS services from Turk Telekom’s network to our network, Turk Telekom will pay us a net amount of TRY 0.029243 approximately $0.021414 per SMS after deducting VAT and other taxes. For SMS services from our network to Turk Telekom’s network, we will pay Turk Telekom a net amount of TRY 0.015126 approximately $0.011076 per SMS after deducting VAT and other taxes.

Calls from one of our subscribers to another one of our subscribers are not subject to a payment to Turk Telekom.

In accordance with the interconnection agreement between Turkcell and Turk Telekom, Turkcell is obliged to pay to Turk Telekom for international calls from our network, 70% of the net amount of the normal per-minute call charge, as outlined in Turk Telekom’s current tariffs. Pursuant to the said agreement Turk Telekom is obliged to pay us for incoming international calls that are terminated on our network 45% of the international settlement charge (terminal rate) that is transferred by the international carrier operator to Turk Telekom. We and Turk Telekom have an ongoing dispute over this agreement. Please see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

We route local traffic to other Turkish operators using Turk Telekom’s interconnect switch, for which we pay the net amount determined for local traffic by Turk Telekom. Currently we pay 0.036921 cents for local calls and 0.051689 cents for non-calls. The switch is an element of a telephone network that connects telephone calls to telephone users on the same or other networks. Turk Telekom does not pay any charge to the network that receives the call and reserves the right to refuse to switch the transit traffic should such charges be imposed.

We do not pay any charges to Turk Telekom for calls to special service numbers which are called free of charge according to Turk Telekom tariffs. For calls to special service numbers that are not free of charge, every service charge is determined separately by the parties. The tariff includes VAT.

Rental Rates

According to the Interconnection Agreement with Turk Telekom, the rental rates for Turk Telekom’s real estate leased by us located in residential areas should be established according to an expert’s report prepared by the local real estate experts of Turkish Emlak Bank. If there is no Turkish Emlak Bank unit in the area, or if the Turkish Emlak Bank cannot prepare an expertise report, then the rental rate is based on the average rental prices determined by the relevant units of the Chamber of Commerce and Industry or, in cases where the above two units are not available, according to a report prepared by a valuation committee that will be established by the participation of three Turk Telekom personnel and one of our personnel.

Upon the expiry of a one-year rental period, rental price increases will be made according to rates issued in the annual state tenders report prepared by the Ministry of Finance, and 45% of the rental fee will be added for expenses including personnel, lighting and water, among others, starting from the beginning of the lease period.

Charges for Energy at Switching Centers

We can subscribe to TEDAS (Turkish Electricity Distribution Co.) or another relevant electricity distribution company as a stand alone customer and pay its energy usage charges. In such case, we will not pay any charges to Turk Telekom. We may also source energy by connecting a three phase electricity measuring gauge to Turk Telekom’s energy distribution panel. The expenses related to the connection of the measuring gauge will be borne by us. In addition, we may source energy by connecting an electricity measuring gauge to Turk Telekom’s generator, provided that all expenses related to the connection will be borne by us. The energy usage fee shall be calculated in accordance with a formula set forth in the Turk

57

Telekom interconnection agreement. Under the Revenue Sharing Agreement, we were not required to pay Turk Telekom for these services.

Miscellaneous

A party may seek to modify the Turk Telekom interconnection agreement by serving the other party with a notice of request to review such agreement if:

·       our license is materially changed (whether by amendment or replacement);

·       a material change occurs in the laws or regulations governing telecommunications in Turkey;

·       the Turk Telekom interconnection agreement expressly provides for a review or makes express provision for a review or the parties agree in writing that there should be such a review;

·       a material change occurs which affects or could affect the commercial or technical basis of the Turk Telekom interconnection agreement; or

·       there is a general review pursuant to the Turk Telekom interconnection agreement.

Upon service of a review notice, the parties must negotiate in good faith toward a resolution of the subject matter of the review. If the parties fail to reach agreement within three months from the date of service of the review notice, either party may request that the Telecommunications Authority determine the manner, if any, in which the Turk Telekom interconnection agreement should be modified. The Turk Telekom interconnection agreement will be modified in accordance with that determination, unless the determination is subject to a legal challenge. The Turk Telekom interconnection agreement can be assigned in accordance with our license agreement. The Turk Telekom interconnection agreement will terminate automatically upon the expiry of our license period or on termination of our license agreement by the Telecommunications Authority. Neither party may assign the businesses which are the subject matter of the interconnection agreement to any third party unless such assignment is required under the provisions of the Regulation and the License Agreement or the other party’s prior consent is obtained.

Telsim Interconnection Agreement

The Telsim interconnection agreement provides for the payment of fees by us to Telsim for the interconnection services provided by Telsim. A number of the provisions of the Telsim interconnection agreement address matters concerning billing and payment of bills for services rendered under the Telsim interconnection agreement. Each party is required to record certain call information and to provide that information to the other party. Each party is responsible for invoicing the other party on a monthly basis.

Call Tariffs

In accordance with the agreement concluded between Turkcell and Telsim on November 21, 2003, the call tariffs are set in Turkish Lira and will be revised by the parties every three months based on the consumer price index. During periods of sharp devaluation of the Turkish Lira, the devaluation rate will also be taken into consideration in such revisions. The pricing terms of the Telsim interconnection agreement will be applicable until the end of June, 2004 when both parties will revise them based on conditions reached at that time. All the rates are net of all applicable taxes. According to a supplemental agreement with Telsim on November 21, 2003, which was agreed after the intervention of the Telecommunications Authority these prices are applicable until June 30, 2004 and should be renewed within two months of such date.

As of 31 March, 2006 a dispute remains between Turkcell and Telsim regarding the revision of the interconnection prices. Telsim has referred this dispute to the Telecommunication Authority for resolution.

58

As of March 31, 2006, we currently pay Telsim a net amount of 0.212415 TRY (approximately 15.9 cents as of April 7, 2006) per minute for traffic switched from us to Telsim. Telsim pays us a net amount of 0.212415 TRY (approximately 15.9 cents as of April 7, 2006) per minute for traffic switched from Telsim to us. For SMS services from Telsim to our network, Telsim pays us a net amount of 0.029708 TRY (approximately 2.2 cents as of April 7, 2006) per SMS and we pay Telsim a net amount of 0.029708 TRY (approximately 2.2 cents as of April 7, 2006) per SMS sent from our network to Telsim’s. Both parties charge each other 0.233657 TRY (approximately 17.5 cents as of April 7, 2006) per minute for accessing each other’s directory inquiry services.

A party may seek to modify the Telsim interconnection agreement by serving the other party with a notice of request to review such agreement if:

·       its license is materially changed (whether by amendment or replacement);

·       a material change occurs in the law or regulations governing telecommunications in Turkey;

·       the interconnection agreement expressly provides for a review or makes express provision for a review or the parties agree in writing that there should be such a review;

·       a material change occurs that affects or could affect the commercial or technical basis of the interconnection agreement; or

·       there is a general review pursuant to the interconnection agreement.

Upon service of a review notice, the parties must negotiate in good faith toward a resolution of the subject matter of the review. If the parties fail to reach agreement within three months from the date of service of the review notice, either party may request that the Telecommunications Authority determine the manner, if any, in which the Telsim interconnection agreement should be modified. The Telsim interconnection agreement will be modified in accordance with that determination, unless the determination is subject to a legal challenge. The Telsim interconnection agreement cannot be assigned or transferred by the parties without the other party’s prior written consent. We and Telsim have an ongoing dispute over call termination fees, please see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings” of this annual report on Form 20-F.

The Telsim interconnection agreement will remain in force for the period of the license period unless one of the parties serves a three month termination notice to the other party.

The Telsim interconnection agreement will terminate:

·       automatically upon expiry of the parties’ respective license periods or on termination of the respective license agreements by the Ministry of Transportation; or

·       save for events of force majeure, upon one month’s termination notice by the parties, due to failure to fulfill the obligations in the interconnection agreement for a period in excess of three months.

Even in the event of termination of the interconnection agreement, all services provided and the obligations of the parties during the term of this agreement will remain effective for a period of six months until interconnection can be established with Turk Telekom or another alternative network operator.

Any disputes between the parties shall first be subject to friendly settlement efforts. In the event that the parties fail to reach an amicable settlement, they then shall refer the matter to the Telecommunications Authority for its recommended solution to the dispute in question. If the proposed solution recommended by the Telecommunications Authority is not accepted by the parties, the parties are free to refer the matter to arbitration in accordance with the provisions of the Turkish Civil Procedural Law.

59

AVEA Iletisim Hizmetleri A.S. Interconnection Agreement

We and Avea, the entity incorporated as a result of merger of Is-TIM and Aycell signed a protocol canceling the interconnection agreement between Turkcell and Aycell and the parties have been agreed that Is-Tim interconnection agreement will be applicable between the parties.

Payments

The Is-Tim interconnection agreement provides for the payment of fees by us to Is-Tim for the interconnection services provided by Is-Tim. A number of the provisions of the interconnection agreement address matters concerning billing and payment of bills for services rendered under the interconnection agreement. Each party is required to record certain call information and to provide that information to the other party. Each party is responsible for invoicing the other party on a monthly basis.

Call Tariffs

The negotiations to renew our interconnection agreement with Is-Tim have ceased because of the merger between Aycell and Is-Tim (for further information see “Item 4B. Business Overview—Industry—The Turkish Mobile Market”). Effective on December 31, 2005, we pay Avea a net amount of 0.293630 TRY (approximately 22 cents as of April 7, 2006) per minute for traffic switched from us to Avea and Avea pays us a net amount of 0.224541 TRY (approximately 17 cents as of April 7, 2006) per minute for traffic switched from Avea to us.

For SMS services from Avea to our network, Avea pays us a net amount of 0.029708 TRY (approximately 2 cents as of April 7, 2006) per SMS and we pay Avea a net amount of 0.029708 TRY (approximately 2 cents as of April 7, 2006) per SMS sent from our network to Avea’s.

A party may seek to modify the interconnection agreement by serving the other party with a notice of request to review the agreement if:

·       its license is materially changed (whether by amendment or replacement);

·       a material change occurs in the law or regulations governing telecommunications in Turkey;

·       the interconnection agreement expressly provides for a review or makes express provision for a review or the parties agree in writing that there should be such a review;

·       a material change occurs which affects or could affect the commercial or technical basis of the interconnection agreement; or

·       there is a general review pursuant to the interconnection agreement.

Upon service of a review notice, the parties must negotiate in good faith toward a resolution of the subject matter of the review. If the parties fail to reach agreement within three months from the date of service of the review notice, either party may request that the Telecommunications Authority determine the manner, if any, in which the interconnection agreement should be modified. The interconnection agreement will be modified in accordance with that determination, unless the determination is subject to a legal challenge. The interconnection agreement cannot be assigned or transferred by the parties without the other party’s prior written consent. We and Avea have an on-going dispute over call term termination fees, please see, “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings” of this annual report on Form 20-F.

The Avea interconnection agreement will remain in force for the duration of the license period unless one of the parties serves a three month termination notice to the other party.

The Avea interconnection agreement will terminate:

·       automatically upon expiry of the parties’ respective license periods or on termination of the respective license agreements by the Ministry of Transportation; or

60

·       save for events of force majeure, upon one month’s termination notice by the parties, due to failure to fulfill the obligations in the interconnection agreement for a period in excess of three months.

Even in the event of termination of the interconnection agreement, all services provided and the obligations of the parties during the term of this agreement will continue to become effective for a period of six months until interconnection can be realized with Turk Telekom or another alternative network operator.

Any disputes between the parties shall be first subject of friendly settlement by the efforts of the parties. In the event that parties fail to reach an amicable settlement, then they shall refer the matter to the Telecommunications Authority for its recommended solution to the dispute in question. If the proposed solution recommended by the Telecommunications Authority is not accepted by the parties, the parties are free to refer the matter to arbitration in accordance with the provisions of the Turkish Civil Procedural Law.

Milleni.com Interconnection Agreement

We entered into a telecommunications services agreement with Milleni.com GmbH (“Milleni.com”) in April 2001. The Milleni.com telecommunications services agreement is intended to supply telecommunications services to each other within Germany and Turkey for an initial period of twelve months, after which the agreement will remain in force unless terminated by either party upon a minimum 60 days advanced written notice by either party.

Under the Milleni.com telecommunications services agreement, each of the parties agree to provide telecommunications services, as defined under the agreement, to each other whereby Milleni.com may convey calls to our switch and we may convey calls to Milleni.com’s switch for onward transmission to their destinations. Scope to the services may be extended subject to the parties’ further agreement. We and Milleni.com undertook to use the Services in accordance with directions, consents, specifications, designations or determinations of the local regulatory authorities within the respective jurisdiction. Moreover, each of the parties guaranteed certain principles for use of services by its customers to the other.

The Milleni.com telecommunications services agreement establishes understandings between the parties relating to a number of operational areas, including applicable interconnection principles and other technical, operational, financial and procedural aspects of interconnection.

Although the Milleni.com interconnection agreement is effective, in practice Turkcell does not carry calls to Milleni.com’s switch for onward transmission to their destinations provided that the termination of these calls on the relevant network and Milleni.com do not convey calls to our switch.

The Milleni.com telecommunications services agreement specifies that the parties shall establish and maintain initial points of connection required for the provisioning of services to and from their respective systems. Initially, the parties shall connect their telecommunications systems via a 2 Mbit/s circuit(s) to be provided by a supplier as agreed by the parties mutually. Ordering and provision of capacity by the supplier shall also be agreed between the parties. Any modifications or extensions to the initial arrangement require agreement between the parties in consideration of the traffic forecasts supplied by each of the parties to the other.

Each party shall bear its own equipment and installation charges for utilization of services and ongoing charges for the circuits to other party’s telecommunications system shall be shared equally.

Call Tariffs

Milleni.com charges us various prices identified within the agreement for calls destined to networks around the globe. Either party may modify its rates upon one-month advanced written notice.

61

Payments

The Milleni.com telecommunications services agreement provides for payment by both parties of fees for interconnection services. In that respect, we are obliged to pay charges due to Milleni.com in monthly arrears within 30 days from the receipt of invoice. Milleni.com should have paid charges due to us in monthly arrears within 30 days from the receipt of invoice.

The Milleni.com telecommunications services agreement indicated that the charges specified in the agreement are exclusive of Value Added Tax or any other applicable tax. If such taxes were due and owing, that amount should have been added to the invoice and charged to the other party at the then prevailing rate.

The Milleni.com telecommunications services agreement states that if a party fails to make charges when due, the amount past due bears daily interest at an annual rate of 3% points greater than Euro LIBOR from the date on which such amount became due until the date on which it is paid, unless the invoice was correctly disputed. The applicable interest should have been accrued day by day and not be compounded.

Miscellaneous

The Milleni.com telecommunications services agreement provides that either party might immediately suspend services or terminate the agreement by serving the other party with written notice if:

·       the other party commits a material breach (including failure to pay any charges) and has not remedied that breach within 30 days after receipt of written notice;

·       a party’s license to operate or to use either party’s system is revoked or terminated for any reason;

·       the other party makes an arrangement or composition with its creditors or makes an application to a competent court for protection from its creditors or a bankruptcy order is made or a resolution is passed for its winding up or a court of competent jurisdiction makes and order for its winding up or dissolution or an administration order is made or a receiver is appointed over any of its assets;

·       the other party does not provide services to a minimum standard agreed by the operation manual and fails to remedy such failure within 30 days of receipt of written notice; or

·       the other party fails to pass switched telecommunications traffic to the first for a period of 3 consecutive months.

Either of the parties can terminate the agreement if force majeure events arise or upon 60 days written notice. Termination or expiry of the agreement should have not affected accrued rights and obligations of the parties and indemnification and confidentiality provisions shall remain in force.

The Milleni.com telecommunications services agreement cannot be assigned without written consent of the other party, provided that rights and obligations thereunder may be assigned to an associated company of that party or to a third party who has acquired its system if such associated company or third party holds all necessary licenses, consents and permissions as may be necessary to fulfill its obligations under the agreement. Any permitted transfer is only effective upon signature by both parties and the assignee of a formal notation agreement under which the assigned shall agree to observe and perform all of the provisions of such telecommunications services agreement.

The Milleni.com telecommunications services agreement is governed under Turkish law and disputes arising thereunder shall be resolved in the Istanbul courts. The Milleni.com telecommunications services agreement also has provisions for settlement of billing disputes, including cooperation, executive management level consideration and referral to experts, if necessary.

62

Globalstar Interconnection Agreement

Call Tariffs

In accordance with the agreement concluded between Turkcell and Globalstar on December 11, 2003, for traffic switched from us to Globalstar we pay Globalstar the charges determined below after deducting VAT, communications tax and other taxes:

·       for traffic between 0 and 500,000 minutes, $0.40 per minute;

·       for traffic between 500,000 and 1,000,000 minutes, $0.31 per minute;

·       for traffic between 1,000,000 and 2,000,000 minutes, $0.25 per minute; and

·       for traffic greater than 2,000,000, $0.20 per minute.

For traffic switched from Globalstar to us, Globalstar pays us $0.175 per minute after deducting VAT, communications tax and other taxes.

Miscellaneous

The Globalstar interconnection agreement will remain in force for the duration of the license period.

The Globalstar interconnection agreement will terminate:

·       automatically upon expiry of the parties’ respective license periods or on termination of the respective license agreements by the Ministry of Transportation;

·       in case of breach of the agreement;

·       by one of the parties serving a thirty-day termination notice to the other party;

·       by a court decision providing cancellation of the agreement; or

·       by the approval of the Telecommunications Authority to cancel the agreement.

Any disputes between the parties shall be first subject to the efforts of the parties to resolve the dispute amicably. If the dispute remains unresolved, the parties will be free to refer the matter to the Istanbul courts.

Agreements Concluded with the Operators Licensed To Provide Long Distance Call Services

Turkcell, as an operator holding significant market power entered into Call Termination Agreements with 9 operators licensed to provide Long Distance Call Services. Under the Call Termination Agreements, Turkcell agreed, among other things, to terminate voice calls carried by the operators and rising from a national fixed telecommunication’s network or/and any international telecommunication’s network in accordance with technical specifications set out in the agreement.

Agreements Concluded with the Operators Licensed to Provide International Transit Traffic Services

Turkcell, entered into International Traffic Carrying Services Agreements with 7 operators. Under these Agreements, we may carry calls to these operators’ switch for onward transmission to their destinations and these operators should provide the termination of these calls on the relevant network. These operators charge us at various prices identified within the scope of the agreement for the calls directed to numerous networks around the globe. The operators may modify their rates upon fifteen days advanced written notice and these rates will be applicable upon our approval.

63

We are continuing to negotiate with other operators holding licenses to provide Long Distance Call Services on the terms of the license agreements and we are expected to sign International Traffic Carrying Services Agreement in 2006.

Prospective Legislation and Regulations

Below, is a brief overview of some of the major proposed legislative and regulatory initiatives in Turkey that, if implemented, could have a significant impact on our operations.

Regulations

Number Portability

Number portability allows subscribers to change their telephone operator or physical location or the type of the service without changing their telephone numbers.

In order to assess operator concerns about number portability, the Telecommunications Authority has sent a questionnaire to the operators regarding technical, marketing and regulatory issues of the Number Portability application.

Defining the Relevant Markets

Currently, only three markets have been nominated by the Telecommunications Authority as relevant markets pursuant to which it is authorized to determine the operators within such market holding significant market power or a dominant market position. These markets are mobile telecommunications market, mobile call termination market and access to GSM mobile networks and call originating market.

Authorization of Value Added Telecommunication Services Operators

The Telecommunications Authority is preparing to authorize the operators to provide Value Added Telecommunication Services by appending an annex to the Authorization Regulation, specifying provisions relating to such services. The Telecommunications Authority will specify the authorizations types and procedures to be applied and minimum value of authorization fee for Value Added Telecommunication Services within the annex.

In order to assess operator concerns regarding this regulation, the Telecommunications Authority has sent a questionnaire to the operators regarding technical, marketing and regulatory issues of the Value Added Telecommunication Services within the European Union Regulations and international applications.

In accordance with the Telecommunications Authority Regulation, we may be required to provide access and/or interconnection services to requesting VAS operators.

Authorization of Mobile Virtual Network Operators (MVNO’s)

According to proposed regulation, Mobile Virtual Network Operators shall provide their services by using the infrastructure of GSM operators. The Telecommunications Authority has published a draft annex to Authorization Regulation specifying provisions relating to MVNO’s. We have objected to the draft Regulation on the grounds that obligating us to share our infrastructure with the MVNO’s would infringe on our rights in accordance with our license agreement.

Authorization of Directory Services Operators

The Telecommunications Authority has published a draft annex to Authorization Regulation specifying provisions relating to Authorization of Directory Services Operators.

64

In accordance with the draft regulation, the Telecommunications Authority will grant licenses to provide Directory Services. Directory Services Operators, shall provide their services without infringing the provisions of the relevant law and regulation related to the protection of the confidentiality by accessing to the database on the subscribers’ information’s of the other authorized Telecom operators (including GSM operators and Turk Telekom). Likewise, to provide authorized services Directory Services Operators should sign an interconnection agreement as a result of the commercial negotiation with the authorized operators. The draft regulation does not contain any provision forcing us to sign an interconnection agreement with the Directory Services Operators.

Legislation

Electronic Communications Law

The draft of the Electronic Communications Law prepared by the Ministry of Transportation aims to establish a similar legislative system to the EU regulatory framework and existing Telecommunications Authority regulations. The draft has the following key terms:

·       The termination of the “access” has been firstly used in a text of the law and the scope of the “access” has been enlarged by authorizing the Telecommunications Authority to specify the statements not designated clearly in the draft legislation which should be deemed as “access”. In accordance with the mentioned provision and expected telecom services authorizations, the Telecommunications Authority may designate us and other Telecom operators as operators holding obligation to provide access.

·       The Telecommunications Authority is authorized to impose any obligations to the operators holding significant market power within the scope of the legislation included but not limited to the following: restrict and interrupt the subscription, oblige the operators to display their activity in separate legal entities, recommend and/or designate the upper limits of tariffs, obligate operators to imply carrier selection to the other telecom operators from their network.

·       As per article 60 of draft law Authority’s power to impose fine on the operators is expanded. By the mentioned article the Authority has a power to impose an administrative fine on the operators in the maximum amount of 5% net sales of the operators belonging to the previous year of the infringement of the relevant legislation by the operators.

·       The Authority has a power to obtain administrative fee in the maximum amount of 5% (per thousand) of net sales of the operators belonging to the previous year in order to cover Authority’s various expenses.

·       In addition to these, the said draft introduced an increase in wireless license end usage fee.

New Environmental Tax

The Turkish Parliament is considering the imposition of a new environmental tax, which would levy a tax on subscribers of mobile operators. It is not clear how this tax will be implemented, but it could have a negative impact on demand for our services or result in increased expenses.

65

4.C   Organizational Structure

The following chart lists each of our key subsidiaries (including our ownership interest in Fintur) and our proportionate ownership interest as of April 10, 2006.

Notes:

(1)          KCell is 51% owned by Fintur and 49% owned by OJSC Kazakhtelecom, the Kazakh incumbent fixed-line telecom provider.

(2)          Azertel is 79.8% owned by Fintur and 20.2% by Cenay Group of companies, a privately held Turkish group of companies. Azercell is 64.3% owned by Azertel and 35.7% by the Ministry of Communications of Azerbaijan.

(3)          Gurtel is 99.99% owned by Fintur. Geocell is 83.2% owned by Gurtel and the remaining by several local companies and individuals.

(4)          Moldcell is 99% owned by Fintur and 1% owned by Molfintur SRL a wholly-owned subsidiary of Fintur.

(5)          On April 4, 2006, LLC Astelit announced the merger of DCC with Astelit. The decision for the merger of DCC with Astelit was approved during the Shareholders’ Meeting which took place on April 3, 2006 in Kiev.

In order to facilitate the diversification of our telecommunications business and the development of additional telecommunications services using advanced technologies, such as Digital television and Internet services, we formed Fintur in 2000 to hold many of our non-GSM and international GSM investments. Fintur was owned jointly with some of our principal shareholders and prior to the restructuring in 2002, we owned 25% of Fintur. The remaining equity of Fintur was owned by Sonera Holding B.V. and members of the Cukurova Group.

During 2002, Fintur restructured its two business divisions, the international GSM businesses and the technology businesses. Under the restructuring agreement, we bought 16.45% of Fintur’s international GSM businesses from the Cukurova Group, increasing our stake in the business to 41.45%.

66

Simultaneously, Fintur sold its entire interest in its technology businesses to the Cukurova Group. We paid a total of $70.7 million to the Cukurova Group.

As a result of the restructuring, Fintur no longer has an interest in its former technology businesses, specifically: Superonline, Digital Platform, European Telecommunications Holding E.T.H. A.G., Mobicom Bilgi Iletisim Hizmetleri A.S., Verinet Uydu Haberlesme Sanayi ve Ticaret A.S., and Topaz Telekomunikasyon Yayincilik Reklamcilik Sanayi ve Ticaret A.S.

4.D    Property, Plants and Equipment

Our principal property, plant and equipment consists of management offices, switching sites, network infrastructure sites and network and office equipment.

Property

We own four properties in Tekirdag, Kocaeli, and two properties in Bursa. We also rent two properties in Davutpasa and Maltepe. Our property in Gaziantep was sold in 2005.

We have buildings in Istanbul Beyoglu (headquarter), Istanbul Maltepe, Istanbul Gunesli I, Istanbul Gunesli II, Ankara I, Ankara II, Adana, Diyarbakir, Samsun, Davutpasa and Izmir. The ownership of the Izmir building was acquired in 2005.

In addition to the foregoing properties, we maintain three rented office buildings and a warehouse in Istanbul.

Switches

We have switches in Ankara, Istanbul, Izmir, Bursa, Adana, Konya, Antalya, Aydin, Erzurum, Balikesir, Bodrum, Denizli, Mugla, DiyarbakIr, Samsun, Izmit and Trabzon.

Base stations

As of December 2005, we owned over 10,289 base stations and leased the land underlying such base stations.

ITEM 4A.        UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview of the Turkish Economy

Positive macroeconomic developments in Turkey, coupled with strong consumer sentiment, helped boost operational results. Revenues increased to $4,269 million in 2005 from $3,201 million in 2004. In addition, our net income increased to $911 million in 2005 from $512 million in 2004.

67

The Turkish economy has gone through a political and economic stabilization period starting from 2002 following the financial turmoil in 2001. The stabilization period started with the IMF stand-by program implemented in 2002 and continued with a new IMF program implemented in 2005 with a three-year maturity. The IMF programs aimed at decreasing the likelihood of the Turkish economy suffering a future crisis by encouraging sustained non-inflationary growth through a floating exchange rate regime, using inflation targeting to combat chronic inflation, strengthening the financial structure of Turkey, implementing reforms in taxation, social security and the banking sector, ensuring debt sustainability and accelerating privatization efforts. The IMF hoped that the implementation of banking reform and enactment of other reforms would improve the liquidity position of the private sector and stimulate growth.

The Turkish economy is now among the fastest growing economies in the world. The Turkish economy is driven by robust private consumption, investment and exports. GDP growth in 2005 has reached 7% with an average annual GDP growth rate of over 7% since the crisis of 2001. Tight macroeconomic policies, based on a high primary surplus and on strict monetary conditions which kept inflation on a steep downward path, have improved confidence. The goal of convergence with the economic policies of the European Union (“EU”), and the close co-operation with the IMF have contributed critically to the momentum of policies. Ahead of the switch to a fully fledged inflation targeting (IT) framework, Turkey demonstrated significant success in not only attaining but most of the time maintaining inflation levels at less than its inflation targets since 2001. Inflation (consumer price index) was down to 7.7% for the year ended December 31, 2005. On the other hand, since inflation figures depend on various factors such as oil prices, the path of the exchange rate as well as domestic pricing behavior, the 5% point target for 2006 constitutes a serious challenge for Turkey.

The major economic problem that Turkey may face in 2006 is primarily the current account deficit despite the marked improvement in the quality of its financing. Turkey’s current account deficit widened from $15.7 billion (5.2% of GDP) in 2004 to above $22 billion (over 6% of GDP) in 2005. In the meantime, Turkey’s official foreign currency reserves have increased steadily on the back of strong capital inflows. These capital inflows have improved in both size and quality. In particular, foreign direct investment inflows picked up markedly last year, financing 40% of the current account deficit. Moreover, the government is still debating the corporate tax cut from 30% to 20%, which is expected to encourage foreign as well as domestic investment if enacted. Although Turkey has made good progress in restoring debt sustainability with a high primary surplus, lower borrowing costs, appreciation of TRY against major currencies and high growth in GDP, the government’s large debt portfolio, which primarily consists of short term and foreign currency debts, reaching to approximately 75% of GDP, implying particularly high rates of rollover on domestic and international markets, remains a big vulnerability. Given the strength of the economy and the risk of a further widening of the current account deficit, the government’s aim should be finding additional revenue sources from stronger growth for debt reduction. At this point, structural reforms, such as overhauling the tax system and social security reform, become critical.

Turkey’s debt dynamics have improved, but remain vulnerable to higher U.S. interest rates and a more stable US dollar. Turkey’s widening current account deficit warns of a devaluation of TRY against foreign currencies while the current account deficit is funded by foreign debt and mostly short term speculative capital flows. However, political tension, even that arising from non-economic issues, has a major impact on capital markets. Any tension between the government and other official authorities, or an early election, can cause political turmoil in Turkey and the economy would be affected negatively. On the EU membership front, Turkey might face significant obstacles in accession negotiations. Even if negotiations begin, they are likely to be long and challenging and EU membership seems unlikely prior to 2015, if at all. It is likely that the topic will remain high on the political agenda and is likely to create some instability in the Turkish economy. The slow progress concerning the implementation of EU-related reforms as well as

68

human rights and freedom of expression issues may also result in periods of tension between Turkey and the EU.

Taxation Issues in Telecommunications Sector

Under the current Turkish tax legislation, there are several taxes on telecommunications services of GSM operators in Turkey. These are charged to the subscribers by the GSM operators and remitted to the relevant taxing authorities by the GSM operators. These taxes may be charged upon subscription, on an annual basis or on an ad valorem basis on the service fees charged to the subscribers.

The following are the most significant taxes imposed on telecommunications services:

Special Communications Tax

The Turkish government imposed a special communications tax of 25% on mobile telephone services as part of a series of new taxes to finance the public works required to respond to earthquakes that struck the Marmara region of Turkey in 1999. The tax, originally applicable from December 1, 1999 through the end of 2000, is paid by mobile users and collected by mobile operators. The Turkish government has subsequently extended the tax twice, first through December 31, 2002 and again through December 31, 2003. With Law No. 5035, the special communications tax was made indefinite since January 1, 2004. A fixed amount of special communications tax of TRY 20 on each new subscription was imposed with Law No. 5035. The special communications tax on new subscriptions was increased to TRY 22 from TRY 20 per subscriber applicable from January 1, 2005 and it increased to TRY 24.15 per subscriber applicable from January 1, 2006. The tax has had a negative impact on mobile usage.

On August 1, 2004, certain provisions of the special communications tax law were amended by Law No. 5228. In particular, the special communications tax imposed on new subscribers that are transferred from one mobile operator to another, has been abolished. For other telecommunication services, which cannot be defined within the context of telecommunication operations of mobile operators (communication, establishment, circulation, transmission), and radio-television broadcasting services, a 15% special communications tax was introduced. The special communications tax is charged at 25% on the usage fees payable by subscribers. The tax collected from subscribers in a calendar month is remitted to the taxing authorities within the first 15 days of the following month.

Value Added Tax (“VAT”)

Like all services in Turkey, services provided by GSM operators are subject to VAT, which is 18% of the service fees charged to the subscribers. We declare VAT to the Ministry of Finance within 20 days and remit VAT paid by our subscribers within the first 26 days of the month following the month in which the tax was incurred, after the offset of input VAT incurred by us. On April 24, 2003, VAT on roaming revenues invoiced to foreign operators, which was 18%, was cancelled.

We have calculated VAT responsibility on ongoing license fees since June 2003 and it was not calculated according to decision of Istanbul Tax Court since February 2004. For more detailed information related to these disputes, see “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

According to the opinion of the Ministry of Finance, VAT responsibility and special communication tax responsibility have been calculated on the invoices issued by foreign GSM operators’ and subscribers’ invoices, including mark up and calls fees, since August 1, 2003.

69

Special Transactions Tax (“STT”)

Like the special communications tax, the Turkish government imposed the STT on certain transactions to finance the funding requirements with respect to the earthquakes that struck the Marmara region in 1999. Originally, this tax was payable through the end of the year 2000. However, this tax was extended through December 31, 2003.

As far as GSM services are concerned, the STT had been charged once upon subscription and annually on an ongoing basis.

A fixed amount of tax, which was TRY 16 (equivalent to $11.92 at December 31, 2005), had been charged to the subscriber in the first invoice issued to the subscriber. The GSM operators had remitted the tax to the taxing authorities in the month after it was collected.

The ongoing tax had been equivalent to the monthly fixed fee charged to the subscribers by the GSM operators regardless of use of the services. This tax had been chargeable to subscribers in 12 equal monthly installments by virtue of provisions included in the Annual Budget Laws. The GSM operators had remitted the tax in the month after it was collected.

With Law No. 5035, STT that had been charged upon subscription and on an ongoing basis have been abolished since January 1, 2004.

Contributions for Education (“Education Tax”)

After the extension of primary education from five years to eight years in 1997, the Education Tax was introduced on certain goods and services to provide funding for such change. Education Tax was originally applicable until the end of 2000, but it has been extended for ten more years and will be applicable until December 31, 2010. For GSM services, the Education Tax was charged in the same manner as the STT, except that the amount of Education Tax upon subscription was TRY 7 (equivalent to $5.22 at December 31, 2005) as of December 31, 2003. With Law No. 5035, Education Tax that was charged upon subscription and on an ongoing basis was abolished effective January 1, 2004.

Wireless Equipment Fees

According to wireless equipment usage law, all receiver equipment must be licensed. As a consequence, mobile wireless telephone owners are subject to both a license fee and an annual usage fee.

The license fee is paid once on subscription for the equipment purchased. The one-time license fee was TRY 8.85 (equivalent to $6.6 at December 31, 2005) at December 31, 2004. Effective from January 1, 2005, it has been increased to TRY 9.8 (equivalent to $7.3 at December 31, 2005). Effective from January 1, 2006, it has been increased to TRY 10 (equivalent to $7.5 at December 31, 2005). For the postpaid subscribers, the license fee is divided into the number of months remaining in the year in which it is payable and charged to the subscriber in equal installments.

The yearly usage fee is the same amount as the license fee and charged to the subscriber in 12 equal monthly installments. Monthly collected charges are paid by us to the government in the following month.

Stamp Duty

Under the Turkish Stamp Duty Law, certain documents such as contracts and other agreements are subject to stamp duty either at a fixed amount (if the document does not include a certain amount) or at a certain percentage of the amount involved in the document.

Stamp duty is applicable to subscription agreements signed between GSM operators and subscribers. Stamp duty payable on such agreements was a fixed amount until July 2003, which was TRY 9.3

70

(equivalent to $6.93 at December 31, 2005). Since July 2003, stamp duty payable on such agreements is 0.075% of the contract amount, which is approximately TRY 0.031 for subscription agreements. Stamp duty is paid once upon signing of the subscription agreement and is paid to the tax authorities by GSM operators who charge the subscriber in the first invoice issued to the subscriber. Effective from January 1, 2005, lump-sum stamp duty liability on the subscription contracts, which does not state any amount on the contract is abolished.

Special Consumption Tax

The Turkish Government introduced a single tax, the special consumption tax, to consolidate several taxes and fees currently applied on certain goods, which became effective on August 1, 2002. GSM services were not directly affected when the new tax was introduced. However, cellular phones are included in the goods that are subject to the special consumption tax. The special consumption tax is charged on cellular phones either at importation or at the level of sale by the Turkish manufacturers. The special consumption tax over cellular phones (cellular phones are defined as “low power mobile wireless equipment” in the law), was 6.7% as of December 31, 2004 and it was increased to 20% as of April 26, 2005.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to fixed assets and intangibles, bad debts, income taxes, contingencies and litigation. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of our significant accounting policies are set forth in note 3 to our consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Fixed assets

Almost all of our operational fixed assets are depreciated over an eight-year term representing our best estimate of their useful lives. If the technology rapidly changed and caused the estimated useful lives to decrease by one year to an average life of seven years, annual depreciation expense on our operational fixed assets would increase by $44 million. However, if the estimated useful lives of our fixed assets increased to nine years, annual depreciation expense on our operational fixed assets would decrease by $38 million.

Impairment of long-lived assets

When events or circumstances arise that require us to test our long-lived assets for impairment, we first evaluate whether the undiscounted expected cash flows of the related assets exceed the book value of these assets. If the book value of the assets is greater than the undiscounted future cash flows, then an impairment exists, and that impairment is measured by the excess of book value over fair value. Fair value is usually measured by discounting cash flows. On an ongoing basis we review indicators of potential impairment which include: 1) significant adverse changes in the legal or business climate that could affect the value of long-lived assets, 2) plans to dispose of a long-lived asset before the end of its previously estimated useful life, and 3) a significant decrease in the market price of a long-lived asset. We are also

71

alert to technological change or a decrease in the number of subscribers, which could cause impairment of our long-lived assets.

In assessing the recoverability of our fixed and intangible assets we make judgments and assumptions regarding estimated future cash flows and other factors. Our estimates of future cash flows are subject to a significant number of variables including the number of subscribers, average revenue per subscriber, inflation, devaluation, competition and other economic factors. To the extent the actual cash flows are less than the estimated cash flows; additional impairment charges may be required. In addition, our discount rate is also based on a number of factors such as the risk free rate of interest, which may change over time.

Estimation of allowance for doubtful accounts

The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of allowance for doubtful accounts. To make these estimates and assumptions, we analyze our accounts receivable and historical bad debts, subscriber credit worthiness and current social and economic trends. If our estimates or assumptions prove incorrect for any reason, we may not have a sufficient allowance to cover our bad debts.

Our bad debt expense as a percentage of revenues increased by approximately 50% to 0.6% of revenues in 2005 from 0.4% in 2004. If our bad debt expense as a percentage of revenues increased to 0.9% of revenues by increasing our bad debt expense as a percentage of revenues 50% from 0.6%, an additional provision for bad debts of approximately $12.1 million would be required.

Liabilities arising from litigation

We are involved in various claims and legal actions arising in the ordinary course of business. We make provisions for liabilities arising from litigation in accordance with SFAS No. 5, which requires us to provide for liabilities arising from litigation when the liabilities become probable and estimable. Our current estimated liability related to some of our pending litigation is based on claims for which our management can estimate the amount and range of loss. We continuously evaluate our pending litigation to determine if any developments in the status of litigation require an accrual to be made. Due to the complexity of the legal system, it is often difficult to accurately estimate the ultimate outcome of the litigation. These variables and others can affect the timing and amount we provide for certain litigation. Our accruals for legal claims are therefore subject to estimates made by us and our legal counsel, which are subject to change as the status of the legal cases develops over time. Such revision in our estimates of the potential liability could materially impact and has materially impacted in the past our consolidated financial condition, results of operations or liquidity.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Our deferred tax assets and liabilities have been remeasured into US dollars in accordance with the provisions of SFAS No. 109 and the transaction gains and losses that result from such remeasurement have been included within the translation loss in the consolidated financial statements.

Non-taxable translation gain (loss) results from translation of TRY-denominated non-monetary assets and liabilities into US dollars, the functional and reporting currency, in accordance with the relevant

72

provisions of SFAS No. 52 as applied to entities in highly inflationary economies. Under SFAS No. 109, such translation gains and losses between the tax and book basis of related assets and liabilities do not give rise to temporary differences. Such amounts are primarily attributable to translation gain resulting from the translation of TRY-denominated fixed assets and intangibles into US dollars.

We establish valuation allowances in accordance with the provisions of SFAS No. 109. We continually review the adequacy of the valuation allowance based on changing conditions in the market place in which we operate and our projections of future taxable income, among other factors. Currently, economic and political situation in Turkey has become more stable and there are positive expectations about the near-term future. Further, there are positive developments regarding Turkey’s accession to the EU. On October 3, 2005, the member states of the EU decided to start membership discussions with Turkey a decision that is expected to have certain political and economic benefits for Turkey in the near future. Furthermore, we signed settlement agreements with Turk Telekom and the Turkish Treasury in the fourth quarter of 2004. We believe that these developments provide us better visibility about the near-term future. Turkish tax legislation does not allow companies to file tax returns on a consolidated basis. Therefore, we believe a valuation allowance should continue to be provided on a portion of the deferred tax assets, resulting from certain consolidated subsidiaries, where the likelihood of realizing these deferred tax assets is not more likely than not. Accordingly, a valuation allowance of approximately $17.0 million was recorded as of December 31, 2005 (December 31, 2004: $17.2 million) for such amounts. For balance sheet presentation purposes, the valuation allowance at December 31, 2004 and December 31, 2005 has been allocated between current and non-current deferred tax assets on a pro rata basis in accordance with the provisions of SFAS No. 109. We believe that it is more likely than not that the net deferred tax asset of approximately $7.7 million as of December 31, 2005 will be realized through reversal of taxable temporary differences as well as future taxable income exclusive of reversing taxable temporary differences. We will continue to evaluate the realizability of our deferred tax assets, including net operating loss and tax credit carryforwards and the related impact on the valuation allowance. If our assumptions are incorrect, there is a material change in local tax legislation or the market conditions become unfavorable, additional valuation allowances could be required.

Hyperinflation in Turkey

The FASB staff believes the determination of a hyperinflationary economy must begin by calculating the cumulative inflation rate for the three years that precede the beginning of the reporting period, including interim reporting periods. If that calculation results in a cumulative inflation rate in excess of 100%, the economy should be considered highly inflationary in all instances. However, if that calculation results in the cumulative rate being less than 100%, the FASB staff believes that historical inflation rate trends (increasing or decreasing) and other pertinent economic factors should be considered to determine whether such information suggests that classification of the economy as highly inflationary is appropriate. The AICPA SEC Regulations Committee’s International Practices Task Force (“IPTF”) concluded at its November 24, 2004 meeting that Turkey would continue to be highly inflationary in 2005. Accordingly, the financial statements of Turkcell and subsidiaries located in Turkey and Northern Cyprus prepared in accordance with US GAAP would be translated into US dollars, the reporting currency, in accordance with the relevant provisions of SFAS No. 52 “Foreign Currency Translation”, as applied to entities in highly inflationary economies.

On November 22, 2005, IPTF concluded that Turkey would cease being regarded as a hyperinflationary country starting from January 1, 2006. TRY will be treated as a more stable currency and our financial statements and those of our subsidiaries located in Turkey and Northern Cyprus prepared in accordance with US GAAP will be translated into US Dollars in accordance with SFAS No. 52 and the resulting cumulative translation adjustment will be recognized in shareholder’s equity.

73

5.A   Operating Results

The financial information contained in the following discussion and analysis has been prepared and is presented on a consolidated basis in accordance with US GAAP in US dollars. The following discussion and analysis should be read in conjunction with the consolidated balance sheets as of December 31, 2004 and 2005 and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005 and the related notes.

Beginning from the 2006 fiscal year, we will prepare our interim and annual consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Our interim and annual consolidated financial statements will include comparable data for 2005. The first Turkcell annual report on Form of 20-F filed containing financial information prepared in accordance with IFRS (with a reconciliation to US GAAP) will be that for the fiscal year ending December 31, 2006. The implementation of IFRS may result in material differences in accounting and/or balances of several items in our annual consolidated financial statements, which may include without limitation:

·       Revenue,

·       Sales and marketing expenses,

·       Depreciation and amortization,

·       EBITDA margin,

·       Net income, and

·       Fixed assets, investments, intangibles.

Certain statements contained below, including information with respect to our plans and strategy for our business, are forward looking statements. The statements contained in this discussion of operating results, which are not historical facts, are forward looking statements with respect to our plans, projections or future performance, the occurrence of which involves certain risks and uncertainties. For a discussion of important factors that could cause actual results to differ materially from such forward-looking statements, see “Item 3D. Risk Factors”.

Overview of Business

We were formed in 1993 and we commenced operations in 1994 pursuant to a revenue-sharing agreement with Turk Telekom. Since April 1998, we have been operating under a 25-year GSM license (the “License”), which was granted upon payment of an upfront license fee of $500 million. At the same time, we entered into an interconnection agreement with Turk Telekom for the interconnection of our network with Turk Telekom’s fixed-line network. On September 20, 2003, we signed an agreement (the “Amended Agreement”) with Turk Telekom amending certain sections of the Interconnection Agreement dated April 24, 1998. As a result of intervention by the Telecommunications Authority, we entered into a new supplemental protocol with Turk Telekom in 2003.

Under the license, we have been paying ongoing license fees to the Turkish Treasury equal to 15% of our gross revenue from our GSM operations in Turkey, which has included monthly fixed fees and communication fees including taxes, charges and duties paid to the Turkish Treasury. Since June 2004, SIM card sales in Turkey, outgoing roaming revenues and late payment interest charges have been included in the definition of gross revenue and included in the monthly ongoing license fees computations. Based on the law enacted on July 3, 2005 with respect to the regulation of privatization, the gross revenue description used for the calculation of treasury share has been changed. According to this new regulation, accrued interest charged for the late payments, taxes such as indirect taxes, and accrued amounts

74

accounted for reporting purposes are excluded from the description of gross revenue. This regulation was published officially on July 21, 2005. Turkcell submitted to Telecommunications Board for the revision of the related articles of the Amended Agreement and completed certain necessary procedures. The Danistay approved the agreement on March 10, 2006. Calculation of gross revenue for ongoing license fee in accordance with the new agreement is valid after March 10, 2006. Therefore, the basis for calculating the universal service fund has also changed.

Under our the Amended Agreement with Turk Telekom, we pay Turk Telekom an interconnection fee per call based on the type and length of call for calls originating on our network and terminating on Turk Telekom’s fixed-line network, as well as fees for other services. We also collect an interconnection fee from Turk Telekom for calls originating on their fixed-line network and terminating on our network. We also have interconnection agreements with Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”), TT&TIM Iletisim Hizmetleri A.S. (“AVEA”), Milleni.com GMBH (“Milleni.com”) and Globalstar Avrasya Uydu Ses ve Data Iletisim A.S. (“Globalstar”) pursuant to which we have agreed, among other things, to pay interconnection fees to the other parties for calls originating on our network and terminating on theirs, and they have agreed to pay interconnection fees for calls originating on their networks and terminating on ours.

From the time of our start-up through December 31, 2005, we have made capital expenditures amounting to approximately $5.2 billion including the cost of our licenses, $0.4 billion of which was related to our Ukraine operations. The build-out of our network in Turkey is now substantially complete, with coverage at December 31, 2005 of 100% of the Turkish population living in cities of 5,000 or more people. As of December 31, 2005, our network covers 99.88% of the Turkish population living in cities of 3,000 or more. Coverage also includes substantially all of the Mediterranean and Aegean coastline of Turkey. We meet the coverage requirements of our license.

Our Turkish GSM subscriber base has expanded from 63,500 at year-end 1994 to 27.9 million as of December 31, 2005 and 28.7 million as of March 31, 2006. Based on the announcements of the Telecommunications Authority, there are approximately 43.6 million subscribers in the Turkish GSM market as of December 31, 2005. The penetration rate in the Turkish GSM market was approximately 60% as of December 31, 2005. We expect that market growth will continue but at a slower pace. In addition, the penetration rate is expected to reach 70% levels during the first half of 2007. In 2005, we have achieved 19% growth in our subscriber base in an increasingly competitive environment, which results in a market share of 64% for us for the year ended December 31, 2005, according to the figures announced by the Telecommunications Authority. The 19% increase in our subscriber base was supported by the favorable economic environment and low subscriber churn rate levels, which were maintained by our segmented retention activities and mass loyalty programs. We expect to maintain our customer-focused approach by introducing offers, campaigns and tariff options with a segment-based approach to better meet the needs and expectations of our subscribers while encouraging usage of our systems. This approach will sustain a balance with our revenue goals. For 2006, we expect to achieve continued double digit growth in our subscriber base but at a slower pace compared to that in 2005.

Our prepaid mobile service increases our market penetration and limits our credit risk. This service permits access to our GSM services to subscribers who prefer to avoid monthly billing or to better control their mobile communication expenses. As of December 31, 2005, we had 22.5 million prepaid and 5.4 million postpaid subscribers in our GSM network in Turkey. Average MoU per prepaid subscriber and average revenue per prepaid subscriber tend to be lower than for postpaid subscribers.

In line with the improvement in the macroeconomic indicators in Turkey, our average MoU per subscriber in Turkey has increased 4% to 67.7 minutes in 2005 from 64.9 minutes in 2004, as a result of the continuing effects of volume based campaigns. Our average revenue per user in Turkey increased to $13.2 in 2005 from $12.3 in 2004. This was mainly due to positive macroeconomic indicators, price adjustments,

75

improved usage and increasing use of value added services despite the renewed loyalty programs and retention campaigns throughout the year. We believe that our market is still in a transitional stage after the long awaited Turk Telekom privatization and the acquisition of Telsim by Vodafone. As part of this transition period, aggressive price based offers which we have seen in the market during the last year are being continued by our competitors into the first quarter of 2006. We expect further improvement in blended MoU in 2006 as a result of ongoing initiatives which aim to further strengthen loyalty and promote usage. In 2006, average revenue per subscriber is likely to decrease mainly due to the dilutive impact of our prepaid subscriber base and campaigns. See “Item 5D. Trend Information”.

Churn is the percentage calculated by dividing the total number of subscriber disconnections, both voluntary and involuntary, during a period by the average number of subscribers for the period. In addition to voluntary disconnections, under our disconnection process, subscribers who do not pay their bills are disconnected from our network and included in churn upon the commencement of the legal process to disconnect them, which occurs approximately 180 days from the due date of the unpaid bill. Pending disconnection, non-paying subscribers are suspended from service (but are still considered subscribers) and receive a suspension warning, which in some cases results in payment and reinstatement of service. Also, prepaid subscribers who do not use any airtime for a period of seven months are disconnected from our network in Turkey. During the year ended December 31, 2004, in addition to voluntary disconnections, we involuntarily disconnected 123,038 additional GSM subscribers in Turkey for nonpayment of bills and our annual churn rate for our operations in Turkey was 9.1%. For the year ended December 31, 2005, in addition to voluntary disconnections, we involuntarily disconnected 129,177 additional GSM subscribers in Turkey for nonpayment of bills and our annual churn rate for our operations in Turkey was 10.1%. The annual churn rate in 2005 slightly increased in line with our expectations. The increase was due to intensified competition and the increasing prepaid subscriber base. However, our retention and mass loyalty programs contributed positively to our efforts to keep our churn rate under control. We have a bad debt provision in our consolidated financial statements for such non-payments and disconnections which amounted to $133.9 million and $149.2 million as of December 31, 2004 and December 31, 2005, respectively, which we believe is adequate. Starting from 2003, the majority of involuntary subscriber disconnections were prepaid subscribers’ disconnections as a result of the increased number of prepaid subscribers in our subscriber base.  In 2006, we expect the churn rate to be higher than in 2005 due to the changing competitive landscape of the Turkish market.

International and Other Domestic Operations

In 2004, Turkcell was a participant in the consortium that was awarded the first private GSM operator tender in Iran. Although the consortium signed a license agreement with the Iranian Ministry of Communication and Information Technology in September 2004, the Iranian Parliament subsequently revised the license agreement in 2005. Our Board of Directors decided to continue with the project despite the modifications to the license agreement, but there has been no notification made by the Iranian Authorities regarding any resolution to the first private GSM operator tender in Iran. As a result, we have requested an injunction order in Iranian courts seeking to compel the Ministry to implement the laws and the regulations passed by the Iranian Parliament in connection with the GSM tender. Such injunction order was rejected in April 2006.

During 2005, to show our willingness to invest in Irancell, we deposited EUR 172.7 million in Bank Saderat Plc. located in London as our potential contribution Irancell. The deposit had been restricted to our use until December 28, 2005 which was also the proposed deadline for the completion of the negotiations. Due to the fact that the negotiations have not been finalized, restricted cash has been released on December 28, 2005.

We still believe in the Iranian market and we are working to establish conditions necessary for us to be able to make investments in Iran. We currently have no operations in Iran.

76

According to the Side Agreement signed between Ericsson Turkey and Turkcell in 2004, Turkcell has been designated as the beneficial owner of the Eastasia shares held by Ericsson Turkey and has been granted a call option to buy Eastasia shares held by Ericsson Turkey at nominal values. We have decided to use our aforementioned call option under the Side Agreement. On February 22, 2006, the transfer of Eastasia shares from Ericsson to Turkcell was finalized and Turkcell ownership in Eastasia increased to 100% from 85%.

For a description of, and additional information regarding, our international and other domestic operations, see “Item 4B. Business Overview”.

Revenues

Our revenues are mainly derived from communication fees, commission fees, monthly fixed fees, sales of SIM cards and call center revenues. Communication fees consist of charges for calls that originate or terminate on our GSM network, including international roaming, and are based on minutes of actual usage of service. Per-minute communication fees vary according to the subscriber’s service package. Commission fees on betting business relate to operating a central betting system and head agency fees. Such fees are recognized at the time the services related to the betting games are rendered. Monthly fixed fees are charged to each postpaid subscriber in a specified monthly amount that varies according to the subscriber’s service package, regardless of actual use of our GSM network services. SIM card revenues are receipts from the sale of SIM cards, which are needed to operate a handset used by a subscriber. Call center revenues consist of revenues for call center services provided by our call center subsidiary to affiliated and third party companies.

We recognize SIM card sales as revenue upon initial entry of a new subscriber into the GSM network only to the extent of the direct costs associated with providing these services. Excess SIM card sales are deferred and recognized over the estimated effective subscription contract life. In connection with postpaid and prepaid subscribers, we currently incur costs for activation fees to dealers and other promotional expenses, which historically offset all or substantially all of the subscription fees. We charge a usage fee for certain services we offer, such as SMS, voicemail and data and facsimile transmission. Our revenues depend on the number of subscribers, call volume and tariff pricing.

As is the case throughout Europe, airtime charges generally are paid only by the initiator of a call, except when a subscriber travels outside Turkey, in which case we charge the subscriber for a portion of the incoming call.

In Turkey, we and other operators have entered into interconnection agreements which set out the terms and conditions regarding the price terms as well as periodical revision of such terms. However, revisions of the pricing terms of the interconnection agreements have been pending as we have not been able to agree on the pricing terms with other operators through our discussions. As per the Access and Interconnection Regulation, the issue has been escalated to the Telecommunications Authority by Turk Telekom, Telsim and Avea. Meanwhile, the Telecommunications Authority issued reference interconnection rates during the fourth quarter of 2004, which indicate pricing terms. Consequently, on August 10, 2005, the Telecommunications Authority issued a ‘temporary interconnection price schedule’ for the interconnection between Turk Telekom, Telsim, Avea and us which are in line with the reference tariff structure defined by the Telecommunications Authority during the fourth quarter of 2004. The Telecommunications Authority is expected to issue a final price structure. In the event that the new prices determined by the Telecommunications Authority are lower than the temporary prices, our financial situation, and/or operating results and cash in-flow could be negatively affected.

On an annual basis our revenues increased as a result of the growth in our subscriber base, a 6% price adjustment on weighted average basis during the year, improved usage and 6% appreciation of TRY against US Dollars during the year. In 2006, we expect our revenues to increase at a slower pace compared

77

to 2005. The main drivers of growth are expected to be subscriber growth, usage increase as well as a stable macroeconomic environment.

Inteltek is operating pursuant to a Head Agency Agreement and Central Betting System operation and risk management Agreements (“CBS Agreement”) signed with a governmental body. The Head Agency Agreement and CBS Agreement entitle Inteltek to receive up to a maximum of 12% and 43% of gross takings as commission, respectively. Under the Head Agency Agreement, Inteltek is obligated to undertake any excess payout, which is presented on net basis with the commission revenues.

Operating Costs

Direct Cost of Revenues

Direct cost of revenues includes mainly ongoing license fees, transmission fees, base station rents, billing costs, cost of simcards sold, depreciation and amortization charges, repair and maintenance expenses directly related to services rendered, roaming charges paid to foreign GSM operators for calls made by our subscribers while outside Turkey, interconnection fees mainly paid to Turk Telekom, Telsim, AVEA, Milleni.com and Globalstar and wages, salaries and personnel expenses for technical personnel. Direct cost of revenues in 2004 also includes costs arising from legal disputes, which relates to items included in direct cost of revenues. For a detailed discussion of our legal and arbitration proceedings, see “Item 8A. Consolidated Statements and Other Financial Information- Legal Proceedings” in our 20-F.

The new interconnection prices determined by the Telecommunications Authority as discussed at Item 5A. Operating Results- Revenues” section above, could also have an effect on the direct cost of revenues in 2006.

General and Administrative

General and administrative expenses consist of fixed costs, including company cars, office rent, office maintenance, travel, insurance, consulting, collection charges, wages, salaries and personnel expenses for non-technical and non-marketing employees and other overhead charges. Our general and administrative expenses also include bad debt expenses of our postpaid subscribers.

Selling and Marketing

Selling and marketing expenses consist of public relations, sales promotions, dealer activation fees, advertising, prepaid frequency usage fees, wages, salaries and personnel expenses of sales and marketing related employees and other expenses, including travel expenses, office expenses, insurance, company car expenses, training and communication expenses.

The average Turkish GSM subscriber acquisition cost (“SAC”) was approximately $22 and $26 per new subscriber for 2004 and 2005, respectively. We compute average acquisition cost per new subscriber by adding sales promotion expenses, SIM card subsidies, activation fees and dividing the sum by the gross number of new GSM subscribers in our Turkish operations for the related period. These costs are recorded as either selling and marketing expense or reduction of revenue in our statements of operations. In 2005 our average SAC increased in line with our expectations mainly due to campaigns initiated during the year parallel to intensified competition, increasing activation and dealers activities as well as 6% appreciation of TRY. We expect the average SAC to increase in 2006 due to increasing competition. However, we expect the proportion of selling and marketing expenses as a percentage of revenues to remain stable in 2006 based on US GAAP financial information.

78

Results of Operations

The following table shows information concerning our consolidated statements of operations for the years indicated.